Classification and Measurement: Limited Amendments to IFRS 9

November 2012 

Exposure Draft ED/2012/4 

Classification and Measurement: 

Limited Amendments to IFRS 9 

Proposed amendments to IFRS 9 (2010) 

Comments to be received by 28 March 2013

Classification and Measurement: Limited 

Amendments to IFRS 9 

(Proposed amendments to IFRS 9 (2010)) 

Comments to be received by 28 March 2013

Exposure Draft ED/2012/4 Classification and Measurement: Limited Amendments to IFRS 9 

(Proposed amendments to IFRS 9 (2010)) is published by the International Accounting 

Standards Board (IASB) for comment only. The proposals may be modified in the light of the 

comments received before being issued in final form as amendments to IFRSs. Comments 

on the Exposure Draft and the Basis for Conclusions should be submitted in writing so as to 

be received by 28 March 2013. Respondents are asked to send their comments 

electronically to the IASB website (www.ifrs.org), using the ‘Comment on a proposal’ page. 

All responses will be put on the public record unless the respondent requests 

confidentiality. However, such requests will not normally be granted unless supported by 

good reason, such as commercial confidence. 

The IASB, the IFRS Foundation, the authors and the publishers do not accept responsibility 

for loss caused to any person who acts or refrains from acting in reliance on the material in 

this publication, whether such loss is caused by negligence or otherwise. 

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CLASSIFICATION AND MEASUREMENT: LIMITED AMENDMENTS TO IFRS 9 (PROPOSED AMENDMENTS TO IFRS 9 (2010)) 

CONTENTS 

from paragraph 

INTRODUCTION AND INVITATION TO COMMENT IN1 

[DRAFT] CLASSIFICATION AND MEASUREMENT: LIMITED 

AMENDMENTS TO IFRS 9 (PROPOSED AMENDMENTS TO 

IFRS 9 (2010)) 

Changes to: 

CLASSIFICATION OF FINANCIAL ASSETS 4.1.1 

SUBSEQUENT MEASUREMENT OF FINANCIAL ASSETS 5.2.1 

RECLASSIFICATION OF FINANCIAL ASSETS 5.6.1 

GAINS AND LOSSES 5.7.1 

EFFECTIVE DATE 7.1.1 

TRANSITION 7.2.1 

WITHDRAWAL OF IFRIC 9 AND IFRS 9 (2009) 7.3.2 

APPENDICES 

B Application guidance 

C Amendments to other IFRSs 

APPROVAL BY THE BOARD OF CLASSIFICATION AND MEASUREMENT: 

LIMITED AMENDMENTS TO IFRS 9 (PROPOSED AMENDMENTS TO IFRS 9 

(2010)) 

BASIS FOR CONCLUSIONS 

ALTERNATIVE VIEWS ON EXPOSURE DRAFT 

[DRAFT] AMENDMENTS TO THE ILLUSTRATIVE EXAMPLE OF IFRS 9 

FINANCIAL INSTRUMENTS (2010) 

[DRAFT] APPENDIX 

Amendments to the guidance on other IFRSs 

3 

� IFRS Foundation

Introduction 

IN1 The International Accounting Standards Board (IASB) has published this 

Exposure Draft of proposed amendments to IFRS 9 Financial Instruments (issued 

October 2010)—referred to as IFRS 9 (2010)—to: 

(a) address specific application questions raised by interested parties; 

(b) take into account the interaction of the classification and measurement 

model for financial assets with the IASB’s Insurance Contracts project; 

and 

(c) reduce key differences with the US Financial Accounting Standards 

Board’s (FASB) tentative classification and measurement model for 

financial instruments. 

IN2 Accordingly, this Exposure Draft proposes limited amendments to IFRS 9 (2010) 

to clarify the existing classification and measurement requirements and to 

introduce a fair value through other comprehensive income (OCI) measurement 

category for particular financial assets that contain contractual cash flows that 

are solely payments of principal and interest. This Exposure Draft also proposes 

that once all chapters of IFRS 9 are completed and the completed version of 

IFRS 9 is issued, only that version of IFRS 9 would be available for early 

application, with one exception. That is, the Exposure Draft proposes to permit 

early application of the requirements issued in October 2010 for the 

presentation in other comprehensive income of gains or losses attributable to 

changes in a liability’s credit risk for financial liabilities designated under the 

fair value option. 

IN3 The IASB noted that many interested parties have either already applied IFRS 9 

early or dedicated significant resources in preparation for its initial application. 

The IASB is mindful of the extent of change to IFRS 9 and is seeking to minimise 

the cost and disruption to interested parties. Accordingly, the IASB proposes 

limited amendments to IFRS 9. The IASB also proposes that the prohibition to 

newly apply previous versions of IFRS 9 only becomes effective six months after 

the completed version of IFRS 9 is issued. 

Next steps 

EXPOSURE DRAFT–NOVEMBER 2012 

IN4 The IASB will consider the comments it receives on the proposals and will decide 

whether to proceed with amendments to IFRS 9 (2010). 

� IFRS Foundation 4


Invitation to comment 

The IASB invites comments on the proposals in this Exposure Draft, particularly on the 

questions set out below. Comments are most helpful if they: 

(a) comment on the questions as stated; 

(b) indicate the specific paragraph or group of paragraphs to which they relate; 

(c) contain a clear rationale; and 

(d) include any alternative the IASB should consider, if applicable. 

In this Exposure Draft, the IASB is not requesting comments on matters in IFRS 9 (2010) that 

are not addressed in the Exposure Draft. 

Comments should be submitted in writing so as to be received no later than 28 March 2013. 

Contractual cash flow characteristics assessment: a modified 

economic relationship between principal and consideration for 

the time value of money and the credit risk 

The IASB has received questions about the application of the contractual cash flow 

characteristics assessment to some financial assets. In particular, questions have been 

raised about financial assets that contain interest rate mismatch features (ie the interest 

rate is reset but the frequency of the reset does not match the tenor of the interest rate). 

Accordingly, this Exposure Draft proposes an amendment to the application guidance in 

IFRS 9 to clarify that if contractual cash flows on a financial asset include only payments 

related to principal and consideration for the time value of money and the credit risk, but 

the economic relationship between those components is modified due to an interest rate 

mismatch feature or leverage (‘a modified economic relationship’), an entity shall assess 

that modification to determine whether the contractual cash flows represent solely 

payments of principal and interest. In assessing a modified economic relationship, an 

entity considers the cash flows of a financial asset that is identical in all respects (including 

reset dates) other than not containing the modification in the economic relationship 

(‘benchmark cash flows’). If the modification could result in contractual cash flows that are 

more than insignificantly different from the benchmark cash flows, the contractual cash 

flows are not solely payments of principal and interest. 

Question 1 

Do you agree that a financial asset with a modified economic relationship between 

principal and consideration for the time value of money and the credit risk could be 

considered, for the purposes of IFRS 9, to contain cash flows that are solely payments of 

principal and interest? Do you agree that this should be the case if, and only if, the 

contractual cash flows could not be more than insignificantly different from the 

benchmark cash flows? If not, why and what would you propose instead? 

Question 2 

Do you believe that this Exposure Draft proposes sufficient, operational application 

guidance on assessing a modified economic relationship? If not, why? What additional 

guidance would you propose and why? 

5 


Question 3 

Do you believe that this proposed amendment to IFRS 9 will achieve the IASB’s objective of 

clarifying the application of the contractual cash flow characteristics assessment to 

financial assets that contain interest rate mismatch features? Will it result in more 

appropriate identification of financial assets with contractual cash flows that should be 

considered solely payments of principal and interest? If not, why and what would you 

propose instead? 

Business model assessment: the ‘fair value through other comprehensive 

income’ measurement category for financial assets that contain contractual 

cash flows that are solely payments of principal and interest 

The Exposure Draft proposes that some financial assets should be mandatorily measured at 

fair value through OCI, 1 specifically, financial assets held within a business model in which 

assets are managed both in order to collect contractual cash flows and for sale (subject to 

the contractual cash flow characteristics assessment; ie these are debt instruments). Under 

the proposals, interest revenue, credit impairment and any gain or loss on derecognition 

would be recognised in profit or loss; all other gains or losses (ie the difference between 

these items and the total change in fair value) would be recognised in OCI. 

Interest income and credit impairment would be computed and recognised in the same 

manner as for financial assets measured at amortised cost. 2 Cumulative gain or loss 

recognised in OCI would be reclassified to profit or loss when the financial asset is 

derecognised. That would result in amortised cost information being provided in profit or 

loss and fair value information being provided in the statement of financial position. 

The Exposure Draft proposes application guidance on how to determine whether the 

business model is to manage assets both to collect contractual cash flows and to sell. 

In addition, the Exposure Draft proposes clarifications to the application guidance in IFRS 9 

on what is a ‘hold to collect’ business model. 

Question 4 


Do you agree that financial assets that are held within a business model in which assets are 

managed both in order to collect contractual cash flows and for sale should be required to 

be measured at fair value through OCI (subject to the contractual cash flow characteristics 

assessment) such that: 

(a) interest revenue, credit impairment and any gain or loss on derecognition are 

recognised in profit or loss in the same manner as for financial assets measured at 

amortised cost; and 

(b) all other gains and losses are recognised in OCI? 

If not, why? What do you propose instead and why? 

1 This is different from the irrevocable option in IFRS 9 to present fair value gains and losses on an 

equity instrument that is not held for trading in OCI. 

2 For the purpose of recognising foreign exchange gains and losses under IAS 21 The Effect of Changes in 

Foreign Exchange Rates, a financial asset classified at the proposed ‘fair value through OCI’ category is 

treated as if it were measured at amortised cost in the foreign currency. Accordingly, exchange 

differences resulting from changes in amortised cost are recognised in profit or loss. 



Question 5 

Do you believe that the Exposure Draft proposes sufficient, operational application 

guidance on how to distinguish between the three business models, including determining 

whether the business model is to manage assets both to collect contractual cash flows and 

to sell? Do you agree with the guidance provided to describe those business models? If not, 

why? What additional guidance would you propose and why? 

The Exposure Draft proposes that the existing fair value option in IFRS 9 should be available 

for financial assets that would otherwise be mandatorily measured at fair value through 

OCI. That is, the Exposure Draft proposes that an entity would be permitted to designate 

such a financial asset as measured at fair value through profit or loss if, and only if, such a 

designation eliminates or significantly reduces a measurement or recognition inconsistency 

(sometimes referred to as an ‘accounting mismatch’). In accordance with the existing fair 

value option in IFRS 9 such designation would be performed at initial recognition and 

would be irrevocable. 

Question 6 

Do you agree that the existing fair value option in IFRS 9 should be extended to financial 

assets that would otherwise be mandatorily measured at fair value through OCI? If not, why 

and what would you propose instead? 

Early application 

At present, more than one version of IFRS 9 can be applied early: that is, an entity is 

permitted to apply either the classification and measurement requirements for financial 

assets only (ie IFRS 9 issued in 2009) or to apply the classification and measurement 

requirements for both financial liabilities and financial assets (ie IFRS 9 issued in 2010). The 

Exposure Draft proposes that only the completed version of IFRS 9 (ie including 

Classification and Measurement, Impairment and General Hedge Accounting chapters) can 

be newly applied prior to the mandatory effective date (except as described in question 8 

below). 3 This proposed amendment would become effective six months after the completed 

version of IFRS 9 is issued. 

Question 7 

Do you agree that an entity that chooses to early apply IFRS 9 after the completed version of 

IFRS 9 is issued should be required to apply the completed version of IFRS 9 (ie including all 

chapters)? If not, why? Do you believe that the proposed six-month period between the 

issuance of the completed version of IFRS 9 and when the prohibition on newly applying 

previous versions of IFRS 9 becomes effective is sufficient? If not, what would be an 

appropriate period and why? 

Presentation of ‘own credit’ gains or losses on financial liabilities 

Notwithstanding the proposed transition requirement above, once IFRS 9 is completed, an 

entity will be permitted to early apply only the ‘own credit’ provisions in IFRS 9, which 

require an entity to present in other comprehensive income fair value gains or losses 

3 Entities that have already applied an earlier version of IFRS 9 by the time these proposed transition 

provisions become effective will be permitted to continue to apply that version until the mandatory 

effective date of IFRS 9 or until the entity chooses to early apply the completed version of IFRS 9. 

7 


attributable to changes in the credit risk of financial liabilities designated as measured at 

fair value through profit or loss, without otherwise changing the classification and 

measurement of financial instruments. 

Question 8 

Do you agree that entities should be permitted to choose to early apply only the ‘own credit’ 

provisions in IFRS 9 once the completed version of IFRS 9 is issued? If not, why and what do 

you propose instead? 

First-time adoption 

This Exposure Draft does not propose any specific changes to IFRS 1 First-time Adoption of 

International Financial Reporting Standards for first-time adopters of IFRS. However, to make 

sure that first-time adopters are given sufficient lead time to apply IFRS 9 and are not at a 

disadvantage in comparison to existing preparers, the IASB intends to consider the 

transition to IFRS 9 for first-time adopters when these proposals are redeliberated. 

Question 9 


Do you believe there are considerations unique to first-time adopters that the IASB should 

consider for the transition to IFRS 9? If so, what are those considerations? 



[Draft] Amendments to International Financial Reporting 

Standard 9 

Financial Instruments (2010) 

[Please note: footnotes are included as context to the proposals and will not be included in the final text.] 

Paragraphs 4.1.1 and 4.1.3–4.1.4 are amended. Paragraph 4.1.2A is added. New text is 

underlined and deleted text is struck through. Paragraph 4.1.2 is shown for reference only 

and is not proposed for amendment. 

4.1 Classification of financial assets 

4.1.1 Unless paragraph 4.1.5 applies, an entity shall classify financial assets as 

subsequently measured at either amortised cost, fair value through other 

comprehensive income or fair value through profit or loss on the basis of 

both: 

(a) the entity’s business model for managing the financial assets and 

(b) the contractual cash flow characteristics of the financial asset. 

4.1.2 A financial asset shall be measured at amortised cost if both of the 

following conditions are met: 

(a) The asset is held within a business model whose objective is to 

hold assets in order to collect contractual cash flows. 

(b) The contractual terms of the financial asset give rise on specified 

dates to cash flows that are solely payments of principal and 

interest on the principal amount outstanding. 

Paragraphs B4.1.1–B4.1.26 provide guidance on how to apply these 

conditions. 

4.1.2A A financial asset shall be measured at fair value through other 

comprehensive income if both of the following conditions are met: 

(a) The asset is held in a business model in which assets are managed 

both in order to collect contractual cash flows and for sale. 

(b) The contractual terms of the financial asset give rise on specified 

dates to cash flows that are solely payments of principal and 


Paragraphs B4.1.1–B4.1.26 provide guidance on how to apply these 

conditions. 

4.1.3 For the purpose of applying paragraphs 4.1.2(b) and 4.1.2A(b), interest is 

consideration for the time value of money and for the credit risk 

associated with the principal amount outstanding during a particular 

period of time. 

9 



4.1.4 A financial asset shall be measured at fair value through profit or loss 

unless it is measured at amortised cost in accordance with paragraph 

4.1.2 or at fair value through other comprehensive income in accordance 

with paragraph 4.1.2A. However an entity may make an irrevocable 

election for particular financial assets in this measurement category to 

present in other comprehensive income subsequent changes in fair value 

(refer to paragraph 5.7.5). 

Paragraphs 5.2.1–5.2.2 are amended. New text is underlined and deleted text is struck 

through. 

5.2 Subsequent measurement of financial assets 

5.2.1 After initial recognition, an entity shall measure a financial asset in 

accordance with paragraphs 4.1.1–4.1.5 at fair value or: 

(a) amortised cost (see paragraphs 9 and AG5–AG8 of IAS 39 4 ); 

(b) fair value through other comprehensive income (refer to 

paragraph 5.7.1A); or 

(c) fair value through profit or loss. 

5.2.2 An entity shall apply the impairment requirements in paragraphs X-X 5 

58–65 and AG84–AG93 of IAS 39 to financial assets measured at amortised 

cost in accordance with paragraph 4.1.2 and financial assets measured at 

fair value through other comprehensive income in accordance with 

paragraph 4.1.2A. 

Paragraphs 5.6.2–5.6.3 are amended. New text is underlined and deleted text is struck 

through. Paragraph 5.6.1 is included for reference only and is not proposed for 

amendment. 

5.6 Reclassification of financial assets 

5.6.1 If an entity reclassifies financial assets in accordance with paragraph 

4.4.1, it shall apply the reclassification prospectively from the 

reclassification date. The entity shall not restate any previously 

recognised gains, losses or interest. 

5.6.2 If, in accordance with paragraph 4.4.1, an entity reclassifies a financial 

asset out of the amortised cost measurement category and so that it is 

4 References to the requirements in IAS 39 will be replaced by references to the relevant paragraphs 

in this Standard when this Standard is completed. 

5 The references in this paragraph will be inserted when the IASB finalises the expected loss 

impairment model and incorporates those requirements in this Standard. The IASB has tentatively 

decided that the same impairment model will be applied to both financial assets in the amortised 

cost measurement category and the fair value through other comprehensive income measurement 

category. 



measured at into the fair value through profit or loss measurement 

category, its fair value is determined at the reclassification date. Any gain 

or loss arising from a difference between the previous carrying amount 

and fair value is recognised in profit or loss. 


asset out of the fair value through profit or loss measurement category 

and so that it is measured at into the amortised cost measurement 

category, its fair value at the reclassification date becomes its new 

carrying amount. 

Paragraphs 5.6.4–5.6.7 are added. 


asset out of the amortised cost measurement category and into the fair 

value through other comprehensive income measurement category, its 

fair value is determined at the reclassification date. Any gain or loss 

arising from a difference between the previous carrying amount and fair 

value is recognised in other comprehensive income. The effective interest 

rate is not adjusted as a result of the reclassification. 


asset out of the fair value through other comprehensive income 

measurement category and into the amortised cost measurement 

category, the financial asset is reclassified at its fair value at the 

reclassification date. However, the cumulative gain or loss previously 

recognised in other comprehensive income is removed from equity and 

adjusted against the fair value of the financial asset at the reclassification 

date. This adjustment affects other comprehensive income but does not 

affect profit or loss and is therefore not a reclassification adjustment (see 

IAS 1 Presentation of Financial Statements). The effective interest rate is 

not adjusted as a result of the reclassification. 


asset out of the fair value through profit or loss measurement category 

and into the fair value through other comprehensive income 

measurement category, its fair value at the reclassification date becomes 

its new carrying amount. 


asset out of the fair value through other comprehensive income 

measurement category and into the fair value through profit or loss 

measurement category, its fair value at the reclassification date becomes 

its new carrying amount. The cumulative gain or loss previously 

recognised in other comprehensive income is reclassified from equity to 

profit or loss as a reclassification adjustment (see IAS 1) at the 

reclassification date. 

11 


Paragraphs 5.7.1 and 5.7.4 are amended. Paragraph 5.7.1A is added. New text is 

underlined and deleted text is struck through. 

5.7 Gains and losses 

5.7.1 A gain or loss on a financial asset or financial liability that is measured at 

fair value and is not part of a hedging relationship (see paragraphs 89–102 

of IAS 39) 6 shall be recognised in profit or loss unless: 

(a) it is part of a hedging relationship (see paragraphs 89–102 of 

IAS 39); [deleted] 

(b) it is an investment in an equity instrument and the entity has 

elected to present gains and losses on that investment in other 

comprehensive income in accordance with paragraph 5.7.5; or 

(c) it is a financial liability designated as at fair value through profit 

or loss and the entity is required to present the effects of changes 

in the liability’s credit risk in other comprehensive income in 

accordance with paragraph 5.7.7; or. 

(d) it is a financial asset classified at fair value through other 

comprehensive income in accordance with paragraph 4.1.2A and 

the entity is required to recognise particular changes in fair value 

in other comprehensive income in accordance with paragraph 

5.7.1A. 

5.7.1A A gain or loss on a financial asset measured at fair value through other 

comprehensive income in accordance with paragraph 4.1.2A shall be 

recognised in other comprehensive income, except for impairment losses 

(see paragraph 5.2.2) and foreign exchange gains and losses (see 

paragraphs B5.7.2–B5.7.3), until the financial asset is derecognised or 

reclassified out of the fair value through other comprehensive income 

measurement category (see paragraph 4.4.1). When the financial asset is 

derecognised the cumulative gain or loss previously recognised in other 

comprehensive income is reclassified from equity to profit or loss as a 

reclassification adjustment (see IAS 1). If the financial asset is reclassified 

out of the fair value through other comprehensive income measurement 

category the entity shall account for the cumulative gain or loss 

previously recognised in other comprehensive income in accordance with 

paragraphs 5.6.5 and 5.6.7. Interest calculated using the effective interest 

method (see paragraphs 9 and AG5–AG8 of IAS 39 7 ) is recognised in profit 

or loss (see IAS 18). 

... 


6 The references will ultimately be updated be updated to reflect [draft] Chapter 6 Hedge Accounting. 


in this Standard when this Standard is completed. 



5.7.4 If an entity recognises financial assets using settlement date accounting 

(see paragraph 3.1.2 and paragraphs B3.1.3 and B3.1.6), any change in the 

fair value of the asset to be received during the period between the trade 

date and the settlement date is not recognised for assets measured at 

amortised cost (other than impairment losses). For assets measured at 

fair value, however, the change in fair value shall be recognised in profit 

or loss or in other comprehensive income, as appropriate under 

paragraphs 5.7.1–5.7.1A. 

Paragraph 7.1.1 is amended and paragraphs 7.1.1A–7.1.1B are added. New text is 

underlined and deleted text is struck through. 

7.1 Effective date 

7.1.1 An entity shall apply this IFRS for annual periods beginning on or after 

1 January 2015. Earlier application is permitted. However, if an entity elects to 

apply this IFRS early and has not already applied IFRS 9 issued in 2009, it must 

apply all of the requirements in this IFRS at the same time (but see also 

paragraph 7.3.2). If an entity applies this IFRS in its financial statements for a 

period beginning before 1 January 2015, it shall disclose that fact and must 

apply all of the requirements in this IFRS. 8 Aat the same time it shall apply the 

amendments in Appendix C (but see also paragraphs 7.1.1A–7.1.1B). 

7.1.1A Classification and Measurement: Limited Amendments to IFRS 9 (Proposed amendments 

to IFRS 9 (2010)) issued on [date to be inserted after exposure]: 

(a) amended paragraphs 4.1.1 and 4.1.3–4.1.4, 5.2.1–5.2.2, 5.6.2–5.6.3, 5.7.1 

and 5.7.4, 7.1.1, 7.2.1–7.2.2, 7.2.4, 7.2.5–7.2.6, 7.2.14, 7.2.16, 7.3.2, B3.1.6, 

B4.1.1, B4.1.3–B4.1.4, B4.1.5–B4.1.7, B4.1.9, B4.1.12–B4.1.13, B4.1.26, 

B4.1.29–B4.1.30, B4.1.36, B4.3.1, the heading before paragraph B4.4.1, 

B5.1.1, B5.2.1–B5.2.2, B5.7.3 and B7.2.1; 

(b) added paragraphs 4.1.2A, 5.6.4–5.6.7, 5.7.1A, 7.1.1A–7.1.1B, 7.2.4A, 7.2.17, 

B4.1.2A–B4.1.2B, B4.1.4A–B4.1.4B, B4.1.8A, B4.1.9A–B4.1.9E, B4.1.21A, 

B5.6.1–B5.6.2, B5.7.1A and B5.7.2A; and 

(c) deleted paragraph 7.2.3 

of IFRS 9 (2010) effective [date to be inserted after exposure]. 9 If an entity applied 

IFRS 9 (issued in 2009), IFRS 9 (issued in 2010) or IFRS 9 incorporating [draft] 

Chapter 6 Hedge Accounting before [date to be inserted after exposure], 10 the 

entity is not required to apply these amendments until the first annual period 

beginning on or after 1 January 2015. 

7.1.1B Notwithstanding the requirements in paragraph 7.1.1, an entity may elect to 

early apply the requirements for the presentation in other comprehensive 

8 This includes the requirements for impairment and general hedge accounting, which will be added 

to this Standard when they are finalised. 

9 The date that is six months after the completed version of IFRS 9 is issued. 


13 


income of gains or losses attributable to changes in a liability’s credit risk for 

financial liabilities designated under the fair value option (paragraphs 5.7.1(c), 

5.7.7–5.7.9, 7.2.13 and B5.7.5–B5.7.20) without early applying the other 

requirements of this IFRS. If an entity has elected to early apply these 

paragraphs, it shall disclose that fact and apply paragraphs 10 and 10A of IFRS 7 

at the same time. 

Paragraphs 7.2.1–7.2.2, 7.2.4, 7.2.5–7.2.6, 7.2.14 and 7.2.16 are amended. Paragraphs 

7.2.4A and 7.2.17 are added. Paragraph 7.2.3 is deleted. New text is underlined and 

deleted text is struck through. 

7.2 Transition 


7.2.1 An entity shall apply this IFRS retrospectively, in accordance with IAS 8 

Accounting Policies, Changes in Accounting Estimates and Errors, except as specified in 

paragraphs 7.2.4–7.2.157.2.17. This IFRS shall not be applied to items that have 

already been derecognised at the date of initial application. 

7.2.2 For the purposes of the transition provisions in paragraphs 7.2.1 and 7.2.3–7.2.16 

7.2.4–7.2.17, the date of initial application is the date when an entity first 

applies the requirements of this IFRS. The date of initial application shall may 

be: 

(a) any date between the issue of this IFRS and 31 December 2010, for 

entities initially applying this IFRS before 1 January 2011; or 

(b) the beginning of the first reporting period in which the entity adopts 

this IFRS, for entities initially applying this IFRS on or after 1 January 

2011. 

7.2.3 If the date of initial application is not at the beginning of a reporting period, the 

entity shall disclose that fact and the reasons for using that date of initial 

application. [Deleted] 

7.2.4 At the date of initial application, an entity shall assess whether a financial asset 

meets the conditions in paragraph 4.1.2(a) or in paragraph 4.1.2A(a) on the basis 

of the facts and circumstances that exist at the date of initial application. The 

resulting classification shall be applied retrospectively irrespective of the 

entity’s business model in prior reporting periods. 

7.2.4A If it is impracticable (as defined in IAS 8) for an entity to retrospectively assess a 

modified economic relationship between the principal and the consideration for 

the time value of money and the credit risk as required by paragraphs 

B4.1.9A–B4.1.9E of this IFRS, an entity shall retrospectively assess the contractual 

cash flow characteristics of the relevant financial assets notwithstanding the 

requirements listed in paragraphs B4.1.9A–B4.1.9E. 

7.2.5 If an entity measures a hybrid contract at fair value in accordance with 

paragraph 4.1.2A, paragraph 4.1.4 or paragraph 4.1.5 but the fair value of the 

hybrid contract had not been measured in comparative reporting periods, the 

fair value of the hybrid contract in the comparative reporting periods shall be 



the sum of the fair values of the components (ie the non-derivative host and the 

embedded derivative) at the end of each comparative reporting period if the 

entity restates prior periods (see paragraph 7.2.14). 

7.2.6 At the date of initial application an entity shall recognise any difference between 

the fair value of the entire hybrid contract at the date of initial application and 

the sum of the fair values of the components of the hybrid contract at the date of 

initial application: 

(a) in the opening retained earnings (or other component of equity, as 

appropriate) of the reporting period of initial application. if the entity 

initially applies this IFRS at the beginning of a reporting period, or 

(b) in profit or loss if the entity initially applies this IFRS during a reporting 

period. 

... 

7.2.14 Despite the requirement in paragraph 7.2.1, an entity that adopts the 

classification and measurement requirements of this IFRS for reporting periods: 

(a) beginning before 1 January 2012 need not restate prior periods and is not 

required to provide the disclosures set out in paragraphs 44S–44W of 

IFRS 7; 

(b) beginning on or after 1 January 2012 and before 1 January 2013 shall 

elect either to provide the disclosures set out in paragraphs 44S–44W of 

IFRS 7 or to restate prior periods; and 

(c) beginning on or after 1 January 2013 shall provide the disclosures set out 

in paragraphs 44S–44W of IFRS 7 but. The entity need not restate prior 

periods. The entity may restate prior periods if, and only if, this is 

possible without the use of hindsight. 

If an entity does not restate prior periods, the entity shall recognise any 

difference between the previous carrying amount and the carrying amount at 

the beginning of the annual reporting period that includes the date of initial 

application in the opening retained earnings (or other component of equity, as 

appropriate) of the annual reporting period that includes the date of initial 

application. However, if an entity restates prior periods, the restated financial 

statements must reflect all of the requirements in this IFRS. 

... 

Entities that have applied early IFRS 9 issued in 2009, 

IFRS 9 issued in 2010 or [draft] IFRS 9 incorporating 

Chapter 6 Hedge Accounting issued in [year] before 

[date to be inserted after exposure] 11 

7.2.16 An entity shall apply the transition requirements in paragraphs 7.2.1–7.2.15 at 

the relevant date of initial application. In other words, an entity shall apply 

paragraphs 7.2.4–7.2.11 if it applies IFRS 9 (issued in 2009) or, not having done 

so, when it applies IFRS 9 (issued in 2010) in its entirety or, not having done so, 


15 


when it applies [draft] IFRS 9 incorporating Chapter 6 Hedge Accounting. An 

entity is not permitted to apply those paragraphs more than once except as 

specified in paragraph 7.2.17. 

7.2.17 An entity that applied IFRS 9 (issued in 2009), IFRS 9 (issued in 2010) or [draft] 

IFRS 9 incorporating Chapter 6 Hedge Accounting before [date to be inserted 

after exposure] 12 and subsequently applies the amendments to IFRS 9 (2010) 

listed in paragraph 7.1.1A: 

(a) shall revoke its previous designation of a financial asset as measured at 

fair value through profit or loss if such a designation was previously 

made in accordance with the condition in paragraph 4.1.5 but that 

condition is no longer satisfied as a result of the application of those 

amendments; 

(b) may designate a financial asset as measured at fair value through profit 

or loss if such a designation would not have previously satisfied the 

condition in paragraph 4.1.5 but that condition is now satisfied as a 

result of the application of those amendments; 

(c) shall revoke its previous designation of a financial liability as measured 

at fair value through profit or loss if such a designation was previously 

made in accordance with the condition in paragraph 4.2.2(a) but that 

condition is no longer satisfied as a result of the application of those 

amendments; and 

(d) may designate a financial liability as measured at fair value through 

profit or loss if such a designation would not have previously satisfied 

the condition in paragraph 4.2.2(a) but that condition is now satisfied as 

a result of the application of those amendments. 

Such a designation and revocation shall be made on initial application of the 

amendments to IFRS 9 (2010) listed in paragraph 7.1.1A. That classification shall 

be applied retrospectively. 

Paragraph 7.3.2 is amended. Deleted text is struck through. 

7.3 Withdrawal of IFRIC 9 and IFRS 9 (2009) 

... 


7.3.2 This IFRS supersedes IFRS 9 issued in 2009. However, for annual periods 

beginning before 1 January 2015, an entity may elect to apply IFRS 9 issued in 

2009 instead of applying this IFRS. 




Appendix B 

Application guidance 

This appendix is an integral part of the IFRS. 

Paragraph B3.1.6 is amended. New text is underlined. 

Recognition and derecognition (chapter 3) 

Regular way purchase or sale of financial assets 

... 

B3.1.6 The settlement date is the date that an asset is delivered to or by an entity. 

Settlement date accounting refers to (a) the recognition of an asset on the day it 

is received by the entity, and (b) the derecognition of an asset and recognition of 

any gain or loss on disposal on the day that it is delivered by the entity. When 

settlement date accounting is applied, an entity accounts for any change in the 

fair value of the asset to be received during the period between the trade date 

and the settlement date in the same way as it accounts for the acquired asset. In 

other words, the change in value is not recognised for assets measured at 

amortised cost; it is recognised in profit or loss for assets classified as financial 

assets measured at fair value through profit or loss; and it is recognised in other 

comprehensive income for assets classified as financial assets measured at fair 

value through other comprehensive income in accordance with paragraph 

4.1.2A and investments in equity instruments accounted for in accordance with 

paragraph 5.7.5. 

Paragraphs B4.1.1 and B4.1.3–B4.1.4 are amended. Paragraphs B4.1.2A–B4.1.2B are 

added. Paragraph B4.1.2 is included for reference only and is not proposed for change. 

New text is underlined and deleted text is struck through. 

Classification (chapter 4) 

Classification of financial assets (section 4.1) 

The entity’s business model for managing financial assets 

B4.1.1 Paragraph 4.1.1(a) requires an entity (unless paragraph 4.1.5 applies) to classify 

financial assets as subsequently measured at amortised cost or fair value on the 

basis of the entity’s business model for managing the financial assets. An entity 

assesses whether its financial assets meet this the condition in paragraph 4.1.2(a) 

or in paragraph 4.1.2A(a) on the basis of the objective of the business model as 

determined by the entity’s key management personnel (as defined in IAS 24). 

B4.1.2 The entity’s business model does not depend on management’s intentions for an 

individual instrument. Accordingly, this condition is not an 

instrument-by-instrument approach to classification and should be determined 

17 



on a higher level of aggregation. However, a single entity may have more than 

one business model for managing its financial instruments. Therefore, 

classification need not be determined at the reporting entity level. For example, 

an entity may hold a portfolio of investments that it manages in order to collect 

contractual cash flows and another portfolio of investments that it manages in 

order to trade to realise fair value changes. 

B4.1.2A The entity’s business model for managing the financial assets is a matter of fact 

that can be observed by the way the business is managed and its performance is 

evaluated by the entity’s key management personnel. The entity’s business 

model for managing the financial assets determines the entity’s likely future 

cash flows from the financial assets. 

B4.1.2B The determination of the business model for managing the financial assets is 

not driven by a single factor. Rather, all objective evidence that is relevant to 

assessing the entity’s business model must be considered. Such evidence 

includes, but is not limited to: 

(a) how the performance of the business is reported to the entity’s key 

management personnel; 

(b) how managers of the business are compensated (for example, whether 

the compensation is based on the fair value of the assets managed); and 

(c) the frequency, timing and volume of sales in prior periods, why such 

sales have occurred and expectations about the sales activity in the 

future. 

B4.1.3 In determining whether cash flows are expected to be collected from contractual 

cash flows, the level of sales activity, as well as the reason for any sales, must be 

considered. Although the objective of an entity’s business model may be to hold 

financial assets in order to collect contractual cash flows, the entity need not 

hold all of those instruments until maturity. Thus an entity’s business model 

can be to hold financial assets to collect contractual cash flows even when sales 

of financial assets occur. For example, the entity may sell a financial asset if: 

(a) the financial asset the credit quality of the financial asset has 

deteriorated such that it no longer meets the entity’s documented 

investment policy. (eg the credit rating of the asset declines below that 

required by the entity’s investment policy); 

(b) an insurer adjusts its investment portfolio to reflect a change in expected 

duration (ie the expected timing of payouts); or 

(c) an entity needs to fund capital expenditures. Such sales are not 

inconsistent with the objective to hold financial assets to collect 

contractual cash flows because the credit quality of financial assets is 

relevant to the entity’s ability to collect contractual cash flows. No 

longer meeting the entity’s documented investment policy is not the 

only evidence that the credit quality of the financial asset has 

deteriorated such that a sale is necessary. However, in the absence of 

such a policy, it may be difficult for an entity to demonstrate that the 

sale is necessary as a result of the deterioration in the asset’s credit 

quality. 



Sales that occur for other reasons may also be consistent with a business model 

whose objective is to hold financial assets in order to collect contractual cash 

flows if such sales are infrequent (even if significant) or insignificant both 

individually and in aggregate (even if frequent). However, if more than an 

infrequent number of sales are made out of a portfolio, the entity needs to assess 

whether and how such sales are consistent with an objective of collecting 

contractual cash flows. Sales of financial assets may be consistent with the 

objective of collecting contractual cash flows if the sales are made close to the 

maturity of the financial assets and the proceeds from the sales approximate the 

collection of the remaining contractual cash flows. 

B4.1.4 The following are examples of when the objective of an entity’s business model 

may be to hold financial assets to collect the contractual cash flows. This list of 

examples is not exhaustive. The examples are not intended to discuss all factors 

that may be relevant to the assessment of the entity’s business model nor specify 

the relative importance of the factors. 

Example Analysis 

Example 1 

An non-financial entity holds 

investments to collect their 

contractual cash flows but would sell 

an investment in particular 

circumstances. The funding needs of 

the entity are predictable and the 

maturity of its financial assets is 

matched to its estimated funding 

needs. 

In the past, sales have typically 

occurred when the credit quality of 

the financial assets has deteriorated 

such that the assets no longer meet 

the entity’s documented investment 

policy. In addition, infrequent sales 

have occurred as a result of 

unanticipated funding needs. 

Reports to key management 

personnel focus on the credit quality 

of the financial assets. The entity 

also monitors fair values of the 

financial assets, among other 

information. 

19 

Although an entity may consider, 

among other information, the 

financial assets’ fair values from a 

liquidity perspective (ie the cash 

amount that would be realised if the 

entity needs to sell assets), the 

entity’s objective is to hold the 

financial assets and collect the 

contractual cash flows. Some sales 

Sales in response to deterioration in 

the assets’ credit quality such that 

they no longer meet the entity’s 

documented investment policy or 

infrequent sales resulting from 

unanticipated funding needs, even if 

such sales are significant, would not 

contradict that objective. 

continued... 


...continued 


Example 2 

An entity’s business model is to 

purchase portfolios of financial 

assets, such as loans. Those portfolios 

may or may not include financial 

assets with incurred credit losses. If 

payment on the loans is not made on 

a timely basis, the entity attempts to 

extract the contractual cash flows 

through various means—for example, 

by making contact with the debtor by 

mail, telephone or other methods. 

In some cases, the entity enters into 

interest rate swaps to change the 

interest rate on particular financial 

assets in a portfolio from a floating 

interest rate to a fixed interest rate. 

... ... 

Example 4 


A financial institution holds financial 

assets to meet liquidity needs in a 

‘stress case’ scenario (for example, a 

run on the bank’s deposits). The 

entity does not anticipate selling 

these assets except in such scenarios. 

The entity monitors the credit quality 

of the financial assets and its 

objective in managing the financial 

assets is to collect contractual cash 

flows. 

� IFRS Foundation 20 

The objective of the entity’s business 

model is to hold the financial assets 

and collect the contractual cash 

flows. The entity does not purchase 

the portfolio to make a profit by 

selling them. 

The same analysis would apply even 

if the entity does not expect to 

receive all of the contractual cash 

flows (eg some of the financial assets 

have incurred credit losses). 

Moreover, the fact that the entity has 

entered into derivatives to modify the 

cash flows of the portfolio does not in 

itself change the entity’s business 

model. Consequently, If the portfolio 

is not managed on a fair value basis, 

the objective of the business model 

could be to hold the assets to collect 

the contractual cash flows. 

The objective of the entity’s business 

model is to hold the financial assets 

to collect contractual cash flows. 

The analysis would not change even 

if during a previous stress case 

scenario the entity had significant 

sales of these financial assets in order 

to meet its liquidity needs. Similarly, 

recurring insignificant sales activity 

(for example, to maintain the desired 

maturity profile of these financial 

assets) is not inconsistent with 

holding financial assets to collect 

contractual cash flows. 

continued...


...continued 


However, the entity also monitors the 

fair value of the financial assets from 

a liquidity perspective to ensure that 

the cash amount that would be 

realised if the entity needed to sell 

the assets would be sufficient to meet 

the entity’s liquidity needs in a stress 

case scenario. 

Paragraphs B4.1.4A–B4.1.4B are added. 

In contrast, if an entity holds 

financial assets to meet its everyday 

liquidity needs and that involves 

recurring and significant sales 

activity, the objective of the entity’s 

business model is not to hold the 

financial assets to collect contractual 

cash flows. 

Similarly, if the entity is required by 

its regulator to routinely sell 

significant volumes of financial assets 

to demonstrate that the assets are 

liquid, the entity’s business model is 

not to hold financial assets to collect 

contractual cash flows. The fact that 

the requirement to sell the financial 

assets is imposed by a third party 

rather than being at the discretion of 

the entity is not relevant to the 

analysis. 

B4.1.4A The entity’s business model for managing the financial assets may be to manage 

assets both to collect contractual cash flows and to sell. In other words, the 

entity’s key management personnel has made a decision that both collecting 

contractual cash flows and selling are fundamental to achieving the objective of 

the business model within which the financial assets are held. Compared to the 

business model whose objective is to hold financial assets to collect contractual 

cash flows, this business model will typically involve greater frequency and 

volume of sales. This is because selling financial assets is integral to achieving 

the business model’s objective rather than only incidental to it. 

B4.1.4B The following are examples of when the entity’s business model may be to 

manage assets both to collect contractual cash flows and to sell. This list of 

examples is not exhaustive. The examples are not intended to describe all 

factors that may be relevant to the assessment of the entity’s business model nor 

specify the relative importance of the factors. 

21 



Example 1 


A non-financial entity anticipates 

capital expenditure in a few years. 

The entity invests its excess cash in 

financial assets in order to fund the 

expenditure when the need arises. 

The entity’s objective for managing 

the financial assets is to maximise 

the return on those financial assets. 

Accordingly, the entity will sell 

financial assets and re-invest the cash 

in financial assets with a higher yield 

when an opportunity arises. 

The managers responsible for the 

portfolio are remunerated based on 

the return generated by the financial 

assets. 


The entity’s business model is to 

manage assets both to collect 

contractual cash flows and to sell. 

The entity will make decisions on an 

ongoing basis about whether 

collecting contractual cash flows or 

selling financial assets will maximise 

the return on the financial assets 

until the need for the invested cash 

arises. 

In contrast, consider an entity that 

anticipates a cash outflow in five 

years to fund capital expenditure and 

invests excess cash in short-term 

financial assets with the objective of 

holding them to collect contractual 

cash flows. When the investments 

mature, the entity will reinvest the 

cash into new short-term financial 

assets. The entity follows this 

strategy until the funds are needed, 

at which time it uses the proceeds 

from the maturing financial assets to 

fund most of the capital expenditure. 

Only insignificant sales occur before 

maturity. Such a business model is 

consistent with the objective of 

holding financial assets to collect 


continued...


...continued 


Example 2 

A financial institution holds financial 

assets to meet its everyday liquidity 

needs. The entity seeks to minimise 

the costs of managing its liquidity 

needs and therefore actively manages 

the contractual yield on the financial 

assets. The entity monitors the 

contractual yield and would hold 

some financial assets to collect 

contractual cash flows and sell other 

financial assets to reinvest in higher 

yielding financial assets or to better 

match the duration of liabilities. 

This strategy has resulted in 

significant recurring sales activity in 

the past, which is expected to 

continue. 

Example 3 

An insurer holds financial assets in 

order to fund insurance contracts 

liabilities. The insurer uses the 

proceeds from the contractual cash 

flows on the financial assets to settle 

insurance contracts liabilities as they 

come due. The insurer also 

undertakes significant buying and 

selling activity to rebalance the 

portfolio of financial assets on a 

regular basis as estimates of the 

expected cash flows needed to fulfil 

the insurance contracts liabilities 

change to ensure that the contractual 

cash flows from the financial assets 

are sufficient to settle those 

liabilities. 

The entity’s business model is to 

manage assets both to collect 


Both holding and selling the financial 

assets are integral to the objective of 

maximising the yield on the financial 

assets while meeting the everyday 

liquidity needs. 

The insurer’s objective is to fund 

insurance contracts liabilities. Both 

collecting contractual cash flows to 

fund liabilities as they come due and 

selling financial assets to maintain 

the desired profile of the asset 

portfolio are integral to achieving 

this objective. Accordingly, the 

insurer’s business model is to manage 

financial assets both to collect 


Paragraphs B4.1.5–B4.1.7 and B4.1.9 are amended. Paragraph B4.1.8A is added. 

Paragraph B4.1.8 is included for reference only and is not proposed for amendment. New 

text is underlined and deleted text is struck through. 

B4.1.5 Financial assets must be measured at fair value through profit or loss if they are 

not held within a business model whose objective is to hold assets to collect 

contractual cash flows or a business model in which assets are managed both in 

23 



order to collect contractual cash flows and for sale. One business model in which 

the objective is not to hold instruments to collect the contractual cash flows is if 

an entity One such business model is if an entity manages the performance of a 

portfolio of financial assets with the objective of realising maximising cash flows 

through the sale of the assets. For example, if an entity actively manages a 

portfolio of assets in order to realise fair value changes arising from changes in 

credit spreads and yield curves, its business model is not to hold those assets to 

collect the contractual cash flows. In this case, the entity’s objective will 

typically results in active buying and selling and the entity is managing the 

instruments to realise fair value gains rather than to collect the contractual cash 

flows. Even though the entity will collect contractual cash flows while it holds 

the financial assets, such a business model is not to manage assets both to collect 

contractual cash flows and to sell. This is because the collection of contractual 

cash flows is not integral to achieving the business model’s objective but rather 

is only incidental to it. 

B4.1.6 A portfolio of financial assets that is managed and whose performance is 

evaluated on a fair value basis (as described in paragraph 4.2.2(b)) is neither not 

held to collect contractual cash flows nor managed both to collect contractual 

cash flows and to sell assets. Also, a portfolio of financial assets that meets the 

definition of held for trading is not held to collect contractual cash flows nor is 

it managed both to collect contractual cash flows and to sell assets. For such 

portfolios, the collection of contractual cash flows is only incidental to achieving 

the business model’s objective. Such portfolios of instruments must be measured 

at fair value through profit or loss. 

Contractual cash flows that are solely payments of principal and 

interest on the principal amount outstanding 

B4.1.7 Paragraph 4.1.1(b) requires an entity (unless paragraph 4.1.5 applies) to classify a 

financial asset as subsequently measured at amortised cost or fair value on the 

basis of its the contractual cash flow characteristics of the financial asset that is 

in a group of financial assets managed for the collection of the contractual cash 

flows. 

B4.1.8 An entity shall assess whether contractual cash flows are solely payments of 

principal and interest on the principal amount outstanding for the currency in 

which the financial asset is denominated (see also paragraph B5.7.2). 

B4.1.8A If the contractual cash flows include payments that are unrelated to principal, 

the time value of money and the credit risk, the contractual cash flows do not 

represent solely payments of principal and interest. Accordingly, such financial 

assets must be measured at fair value through profit or loss. 

B4.1.9 Leverage is a contractual cash flow characteristic of some financial assets. 

Leverage modifies the economic relationship between principal and the 

consideration for the time value of money and the credit risk. More than 

insignificant leverage Leverage increases the variability of the contractual cash 

flows with the result that they do not have the economic characteristics of 

interest. Stand-alone option, forward and swap contracts are examples of 

financial assets that include such leverage. Thus such contracts do not meet the 



condition in paragraphs 4.1.2(b) and 4.1.2A(b) and cannot be subsequently 

measured at amortised cost or at fair value through other comprehensive 

income. 

Paragraphs B4.1.9A–B4.1.9E are added. 

B4.1.9A In other cases, the economic relationship between principal and the 

consideration for the time value of money and the credit risk in a financial asset 

may be modified by an interest rate reset feature (ie an interest rate that is reset 

where the frequency of the reset does not match the tenor of the interest rate). 

In such cases and in the case of leverage (collectively referred to as ‘a modified 

economic relationship’), an entity shall assess the modification to determine 

whether the contractual cash flows represent solely payments of principal and 


B4.1.9B Unless paragraph B4.1.9E applies, when assessing a modified economic 

relationship, an entity shall consider cash flows on a comparable financial asset 

that does not contain the modification (benchmark cash flows). The appropriate 

comparable financial asset is a contract of the same credit quality and with the 

same contractual terms (including, when relevant, the same reset periods), 

except for the contractual term under evaluation. For example, if the financial 

asset under assessment contains a variable interest rate that is reset monthly to 

a three-month interest rate, the appropriate benchmark would be a financial 

asset with the identical contractual terms and the identical credit quality except 

that the variable interest rate is reset monthly to a monthly interest rate. An 

entity may consider either an actual or a hypothetical financial asset as the basis 

for the assessment. 

B4.1.9C If the modification could result in cash flows that are more than insignificantly 

different from the benchmark cash flows, the financial asset does not meet the 

condition in paragraphs 4.1.2(b) and 4.1.2A(b). The reason for the rate being set 

in this way is not relevant to the analysis. For example, the conclusion would be 

unchanged whether the rate is required to be set in this way to provide 

consumer protection or is included in a bespoke structured product to achieve a 

particular economic outcome. 

B4.1.9D When assessing a modified economic relationship in a financial asset, an entity 

shall consider variables that could affect future cash flows. For example, if an 

entity is assessing a constant maturity bond with a five-year term and a variable 

rate that is reset semi-annually to a five-year rate, and the interest rate curve at 

the time of the assessment is such that the difference between a five-year rate 

and a semi-annual rate is not more than insignificant, that in itself does not 

enable the entity to conclude that the contractual cash flows are solely payments 

of principal and interest. The entity shall also consider whether the relationship 

between the five-year rate and the semi-annual rate could change over the life of 

the instrument such that the contractual cash flows over the life of the 

instrument could be more than insignificantly different from the benchmark 

cash flows. However, an entity shall only consider reasonably possible scenarios 

rather than every possible scenario. If an entity is unable to conclude that 

25 


contractual cash flows could not be more than insignificantly different from the 

benchmark cash flows, the financial asset shall be measured at fair value 

through profit or loss. 

B4.1.9E If it is clear, with little or no analysis, whether the cash flows on the financial 

asset under the assessment could or could not be more than insignificantly 

different from the benchmark cash flows, an entity need not perform a detailed 

assessment. 

Paragraphs B4.1.12–B4.1.13 are amended. New text is underlined and deleted text is 

struck through. 

B4.1.12 A contractual term that changes the timing or amount of payments of principal 

or interest does not result in contractual cash flows that are solely principal and 

interest on the principal amount outstanding unless it: 

(a) is a variable interest rate that is consideration for the time value of 

money and the credit risk (which the consideration for credit risk may be 

determined at initial recognition only, and so may be fixed) associated 

with the principal amount outstanding; and 

(b) if the contractual term is a prepayment option, meets the conditions in 

paragraph B4.1.10; or 

(c) if the contractual term is an extension option, meets the conditions in 

paragraph B4.1.11. 

B4.1.13 The following examples illustrate contractual cash flows that are solely 

payments of principal and interest on the principal amount outstanding. This 

list of examples is not exhaustive. 

Instrument Analysis 

Instrument A 


Instrument A is a bond with a stated 

maturity date. Payments of principal 

and interest on the principal amount 

outstanding are linked to an 

inflation index of the currency in 

which the instrument is issued. The 

inflation link is not leveraged and 

the principal is protected. 


The contractual cash flows are solely 

payments of principal and interest on 

the principal amount outstanding. 

Linking payments of principal and 

interest on the principal amount 

outstanding to an unleveraged 

inflation index resets the time value 

of money to a current level. In other 

words, the interest rate on the 

instrument reflects ‘real’ interest. 

Thus, the interest amounts are 

consideration for the time value of 

money on the principal amount 

outstanding. 

continued...


...continued 


Instrument B 

Instrument B is a variable interest 

rate instrument with a stated 

maturity date that permits the 

borrower to choose the market 

interest rate on an ongoing basis. 

For example, at each interest rate 

reset date, the borrower can choose 

to pay three-month LIBOR for a 

three-month term or one-month 

LIBOR for a one-month term 

27 

However, if the interest payments 

were indexed to another variable such 

as the debtor’s performance (eg the 

debtor’s net income) or an equity 

index, the contractual cash flows are 

not payments of principal and 

interest on the principal amount 

outstanding (unless the indexing to 

the debtor’s performance results in an 

adjustment that only compensates for 

changes in the credit quality of the 

instrument, such that contractual 

cash flows will only represent 

payments for principal and interest). 

That is because the interest payments 

are not consideration for the time 

value of money and for credit risk 

associated with the principal amount 

outstanding. There is variability in 

the contractual interest payments 

that is inconsistent with market 

interest rates. 

The contractual cash flows are solely 

payments of principal and interest on 

the principal amount outstanding as 

long as the interest paid over the life 

of the instrument reflects 

consideration for the time value of 

money and for the credit risk 

associated with the instrument. The 

fact that the LIBOR interest rate is 

reset during the life of the instrument 

does not in itself disqualify the 

instrument. 

continued... 


...continued 




However, if the borrower is able to 

choose to pay one-month LIBOR for 

three months and that one-month 

LIBOR is not reset each month, the 

contractual cash flows are not 

payments of principal and interest. 

The same analysis would apply if the 

borrower is able to choose between 

the lender’s published one-month 

variable interest rate and the lender’s 

published three-month variable 

interest rate. 

However, if the borrower is able to 

choose to pay a one-month interest 

rate that is reset every three months, 

the interest rate is reset with a 

frequency that does not match the 

tenor of the interest rate and this is 

therefore a modified economic 

relationship. Likewise, if the an 

instrument has a contractual interest 

rate that is based on a term that 

exceeds the instrument’s remaining 

life (such as where an instrument 

with a five-year maturity pays a 

variable rate that is reset periodically 

but always reflects a five year 

maturity), its contractual cash flows 

the economic relationship is 

modified. That is because the interest 

payable in each period is 

disconnected from both the term of 

the instrument (except at origination 

in the latter case) and the time value 

of money over that period. 

continued...


...continued 


In such cases, the entity must assess 

the contractual cash flows against the 

cash flows on an instrument that is 

identical in all respects except for the 

tenor of the interest rate to determine 

if the are not payments represent 

solely of principal and interest on the 

principal amount outstanding. For 

example, in assessing a constant 

maturity bond with a five-year term 

that pays a variable rate that is reset 

semi-annually periodically but always 

reflects a five-year maturity does not 

result in contractual cash flows that 

are payments of principal and interest 

on the principal amount outstanding. 

That is because the interest payable in 

each period is disconnected from the 

term of the instrument (except at 

origination)., an entity considers the 

contractual cash flows on an 

instrument that resets semi-annually 

to a semi-annual interest rate but is 

otherwise identical. 

Paragraph B4.1.21A is added. Paragraph B4.1.26 is amended. New text is underlined. 

Contractually linked instruments 

... 

B4.1.21A A tranche is deemed to satisfy B4.1.21(a) if it would otherwise have payments 

that are solely principal and interest but is prevented from meeting this 

requirement solely because it is prepayable contingent on a prepayment 

occurring in the underlying pool. 

... 

B4.1.26 If the holder cannot assess the conditions in paragraph B4.1.21 at initial 

recognition, the tranche must be measured at fair value through profit or loss. 

If the underlying pool of instruments can change after initial recognition in 

such a way that the pool may not meet the conditions in paragraphs B4.1.23 and 

B4.1.24, the tranche does not meet the conditions in paragraph B4.1.21 and 

must be measured at fair value through profit or loss. However, if the 

underlying pool includes instruments that are collateralised by assets that do 

29 


not meet the conditions in paragraphs B4.1.23–B4.1.24, the collateral shall be 

disregarded for the purposes of applying this paragraph. 

Paragraphs B4.1.29–B4.1.30 are amended. New text is underlined and deleted text is 

struck through. 

Designation eliminates or significantly reduces an accounting 

mismatch 

B4.1.29 Measurement of a financial asset or financial liability and classification of 

recognised changes in its value are determined by the item’s classification and 

whether the item is part of a designated hedging relationship. Those 

requirements can create a measurement or recognition inconsistency 

(sometimes referred to as an ‘accounting mismatch’) when, for example, in the 

absence of designation as at fair value through profit or loss, a financial asset 

would be classified as subsequently measured at fair value through profit or loss 

and a liability the entity considers related would be subsequently measured at 

amortised cost (with changes in fair value not recognised). In such 

circumstances, an entity may conclude that its financial statements would 

provide more relevant information if both the asset and the liability were 

measured as at fair value through profit or loss. 

B4.1.30 The following examples show when this condition could be met. In all cases, an 

entity may use this condition to designate financial assets or financial liabilities 

as at fair value through profit or loss only if it meets the principle in paragraph 

4.1.5 or 4.2.2(a). 

(a) An entity has liabilities under insurance contracts whose measurement 

incorporates current information (as permitted by IFRS 4, paragraph 24), 

and financial assets it considers related that would otherwise be 

measured at amortised cost fair value through other comprehensive 

income. 

... 

Paragraphs B4.1.36 is amended. New text is underlined and deleted text is struck 

through. 

A group of financial liabilities or financial assets and financial 

liabilities is managed and its performance is evaluated on a fair 

value basis 

... 


B4.1.36 Documentation of the entity’s strategy need not be extensive but should be 

sufficient to demonstrate compliance with paragraph 4.2.2(b). Such 

documentation is not required for each individual item, but may be on a 

portfolio basis. For example, if the performance management system for a 

department—as approved by the entity’s key management personnel—clearly 



demonstrates that its performance is evaluated on a fair value basis a total 

return basis, no further documentation is required to demonstrate compliance 

with paragraph 4.2.2(b). 


Embedded derivatives (section 4.3) 

B4.3.1 When an entity becomes a party to a hybrid contract with a host that is not an 

asset within the scope of this IFRS, paragraph 4.3.3 requires the entity to identify 

any embedded derivative, assess whether it is required to be separated from the 

host contract and, for those that are required to be separated, measure the 

derivatives at fair value at initial recognition and subsequently at fair value 


The heading before paragraph B4.4.1 is amended. Deleted text is struck through. 

Paragraph B4.4.1 is included for reference only and is not proposed for amendment. 

Reclassification of financial assets (section 4.4) 

B4.4.1 Paragraph 4.4.1 requires an entity to reclassify financial assets if the objective of 

the entity’s business model for managing those financial assets changes. Such 

changes are expected to be very infrequent. Such changes must be determined 

by the entity’s senior management as a result of external or internal changes 

and must be significant to the entity’s operations and demonstrable to external 

parties. Examples of a change in business model include the following: 


Measurement (chapter 5) 

Initial measurement (section 5.1) 

B5.1.1 The fair value of a financial instrument at initial recognition is normally the 

transaction price (ie the fair value of the consideration given or received, see also 

paragraph B5.1.2A and IFRS 13). However, if part of the consideration given or 

received is for something other than the financial instrument, an entity shall 

measure the fair value of the financial instrument and classify the financial 

instrument in accordance with paragraph 4.1.1. For example, the fair value of a 

long-term loan or receivable that carries no interest can be measured as the 

present value of all future cash receipts discounted using the prevailing market 

rate(s) of interest for a similar instrument (similar as to currency, term, type of 

interest rate and other factors) with a similar credit rating. Any additional 

amount lent is an expense or a reduction of income unless it qualifies for 

recognition as some other type of asset. 

31 



Paragraphs B5.2.1–B5.2.2 are amended. New text is underlined and deleted text is struck 

through. 

Subsequent measurement of financial assets 

(section 5.2) 

B5.2.1 If a financial instrument that was previously recognised as a financial asset is 

measured at fair value through profit or loss and its fair value decreases below 

zero, it is a financial liability measured in accordance with paragraph 4.2.1. 

However, hybrid contracts with hosts that are assets within the scope of this IFRS 

are always measured in accordance with paragraph 4.3.2. 

B5.2.2 The following example illustrates the accounting for transaction costs on the 

initial and subsequent measurement of an equity investment financial asset that 

is elected to be measured at fair value with changes through other 

comprehensive income in accordance with paragraph 5.7.5. An entity acquires 

an asset for CU100 plus a purchase commission of CU2. Initially, the entity 

recognises the asset at CU102. The reporting period ends one day later, when 

the quoted market price of the asset is CU100. If the asset were sold, a 

commission of CU3 would be paid. On that date, the entity measures the asset at 

CU100 (without regard to the possible commission on sale) and recognises a loss 

of CU2 in other comprehensive income. 

Paragraphs B5.6.1–B5.6.2 and heading are added. 

Reclassification of financial assets (section 5.6) 

B5.6.1 Paragraph 5.6.1 requires the reclassification of financial assets to be applied 

prospectively from the reclassification date. Both the amortised cost and fair 

value through other comprehensive income categories require the effective 

interest rate to be determined at initial recognition. When reclassifying a 

financial asset between amortised cost and fair value through other 

comprehensive income, the recognition of interest income will therefore not 

change and an entity shall continue to use the effective interest rate determined 

at initial recognition of the financial asset. Financial assets that are reclassified 

out of the fair value through other comprehensive income category to the 

amortised cost category shall be measured at amortised cost as if they had 

always been classified as such by transferring the cumulative gain or loss 

previously recognised in other comprehensive income out of equity with the 

offsetting entry against the fair value of the financial assets at the 

reclassification date. 

B5.6.2 However, for financial assets measured at fair value through profit or loss, an 

entity is not required to separately recognise interest income. When 

reclassifying financial assets out of the fair value through profit or loss category, 

the fair value at the date of the reclassification becomes the carrying amount 

and the effective interest rate is determined based on that carrying amount. 



Paragraphs B5.7.1A and B5.7.2A are added. 

Gains and losses (section 5.7) 

... 

B5.7.1A Paragraph 4.1.2A requires instruments with contractual terms that give rise to 

cash flows that are solely payments of principal and interest on the principal 

amount outstanding, and that are held in a business model in which the assets 

are managed both in order to collect contractual cash flows and for sale, to be 

measured at fair value through other comprehensive income. This 

measurement presents information in profit or loss as if the financial assets are 

measured at amortised cost, while measurement in the statement of financial 

position will reflect the fair value of the financial assets. Gains or losses, other 

than those recognised in profit or loss in accordance with paragraph 5.7.1A, 

shall be recognised in other comprehensive income. When these financial assets 

are derecognised, cumulative gains or losses previously recognised in other 

comprehensive income shall be reclassified to profit or loss. This will reflect the 

gain or loss that would have been recognised in profit or loss upon 

derecognition if the financial asset was measured on an amortised cost basis. 

... 

B5.7.2A For the purpose of recognising foreign exchange gains and losses under IAS 21, a 

financial asset measured at fair value through other comprehensive income in 

accordance with paragraph 4.1.2A is treated as a monetary item. Accordingly, 

such a financial asset is treated as if it were carried at amortised cost in the 

foreign currency. Exchange differences resulting from changes in amortised 

cost are recognised in profit or loss and other changes in the carrying amount 

are recognised in accordance with paragraph 5.7.1A. 

Paragraph B5.7.3 is amended. New text is underlined and deleted text is struck through. 

B5.7.3 Paragraph An equity investment measured at fair value through other 

comprehensive income in accordance with paragraph 5.7.5 permits an entity to 

make an irrevocable election to present in other comprehensive income changes 

in the fair value of an investment in an equity instrument that is not held for 

trading. Such an investment is not a monetary item. Accordingly, the gain or 

loss that is presented in other comprehensive income in accordance with 

paragraph 5.7.5 includes any related foreign exchange component. 

33 



Effective date and transition (chapter 7) 

Transition (section 7.2) 


Financial assets held for trading 

B7.2.1 At the date of initial application of this IFRS, an entity must determine whether 

the objective of the entity’s business model for managing any of its financial 

assets meets the condition in paragraph 4.1.2(a) or in paragraph 4.1.2A(a) or if a 

financial asset is eligible for the election in paragraph 5.7.5. For that purpose, 

an entity shall determine whether financial assets meet the definition of held 

for trading as if the entity had acquired the assets at the date of initial 

application. 



Appendix C 

Amendments to other IFRSs 

Except where otherwise stated, an entity shall apply the amendments outlined in this [draft] 

appendix when it applies Classification and Measurement: Limited Amendments to IFRS 9 

(Proposed amendments to IFRS 9 (2010)) issued on [date to be inserted after exposure]. 

IFRS 1 First-time Adoption of International Financial Reporting 

Standards 

Paragraphs B4 and B8 are amended. New text is underlined. 

Hedge accounting 

B4 As required by IFRS 9, at the date of transition to IFRSs an entity shall: 

(a) measure all derivatives at fair value through profit or loss; and 

(b) eliminate all deferred losses and gains arising on derivatives that were 

reported in accordance with previous GAAP as if they were assets or 

liabilities. 

Classification and measurement of financial assets 

B8 An entity shall assess whether a financial asset meets the conditions in 

paragraphs 4.1.2 or 4.1.2A of IFRS 9 on the basis of the facts and circumstances 

that exist at the date of transition to IFRSs. 

IFRS 3 Business Combinations 

Paragraph 16 is amended. New text is underlined. 

Recognising and measuring the identifiable assets 

acquired, the liabilities assumed and any non-controlling 

interest in the acquiree 

Recognition principle 

Classifying or designating identifiable assets acquired and liabilities 

assumed in a business combination 

... 

16 In some situations, IFRSs provide for different accounting depending on how an 

entity classifies or designates a particular asset or liability. Examples of 

classifications or designations that the acquirer shall make on the basis of the 

pertinent conditions as they exist at the acquisition date include but are not 

limited to: 

(a) classification of particular financial assets and liabilities as measured at 

fair value through profit or loss, or at amortised cost, as financial assets 

mandatorily measured at fair value through other comprehensive 

35 


income or equity investments designated to be measured as such upon 

initial recognition in accordance with IFRS 9 Financial Instruments; 

(b) designation of a derivative instrument as a hedging instrument in 

accordance with IAS 39; and 

(c) assessment of whether an embedded derivative should be separated from 

a host contract in accordance with IFRS 9 (which is a matter of 

‘classification’ as this IFRS uses that term). 

IFRS 4 Insurance Contracts 


Redesignation of financial assets 

45 Notwithstanding paragraph 4.4.1 of IFRS 9, when an insurer changes its 

accounting policies for insurance liabilities, it is permitted, but not required, to 

reclassify some or all of its financial assets so that they are measured at fair value 

through profit or loss. This reclassification is permitted if an insurer changes 

accounting policies when it first applies this IFRS and if it makes a subsequent 

policy change permitted by paragraph 22. The reclassification is a change in 

accounting policy and IAS 8 applies. 

IFRS 7 Financial Instruments: Disclosures 

Paragraphs 8 is amended. New text is underlined. 

Categories of financial assets and financial liabilities 

8 The carrying amounts of each of the following categories, as specified in IFRS 9, 

shall be disclosed either in the statement of financial position or in the notes: 

(a) financial assets measured at fair value through profit or loss, showing 

separately (i) those designated as such upon initial recognition and (ii) 

those mandatorily measured at fair value through profit or loss in 

accordance with IFRS 9. 

... 


(h) financial assets measured at fair value through other comprehensive 

income, showing separately (i) financial assets that are mandatorily 

measured at fair value through other comprehensive income in 

accordance with IFRS 9; and (ii) equity investments designated to be 

measured as such upon initial recognition. 




Financial assets or financial liabilities at fair value 

through profit or loss 

9 If the entity has designated as measured at fair value through profit or loss a 

financial asset (or group of financial assets) that would otherwise be measured at 

fair value through other comprehensive income or amortised cost, it shall 

disclose: 

... 

The heading before paragraph 11A is amended. New text is underlined and deleted text is 

struck through. Paragraph 11A is included for reference only and is not proposed for 

amendment. 

Financial assets designated measured at fair value 

through other comprehensive income 

11A If an entity has designated investments in equity instruments to be measured at 

fair value through other comprehensive income, as permitted by paragraph 

5.7.5 of IFRS 9, it shall disclose: 

(a) which investments in equity instruments have been designated to be 

measured at fair value through other comprehensive income. 

(b) the reasons for using this presentation alternative. 

(c) the fair value of each such investment at the end of the reporting period. 

(d) dividends recognised during the period, showing separately those 

related to investments derecognised during the reporting period and 

those related to investments held at the end of the reporting period. 

(e) any transfers of the cumulative gain or loss within equity during the 

period including the reason for such transfers. 

Paragraphs 12C–2D are amended. New text is underlined and deleted text is struck 

through. 

Reclassification 

12C For each reporting period following reclassification until derecognition, an 

entity shall disclose for assets reclassified out of the fair value through profit or 

loss category so that they are measured at amortised cost in accordance with 

paragraph 4.4.1 of IFRS 9: 

(a) the effective interest rate determined on the date of reclassification; and 

(b) the interest income or expense recognised. 

37 


12D If an entity has reclassified financial assets out of the fair value through profit or 

loss category so that they are measured at amortised cost since its last annual 

reporting date, it shall disclose: 

(a) the fair value of the financial assets at the end of the reporting period; 


(b) the fair value gain or loss that would have been recognised in profit or 

loss during the reporting period if the financial assets had not been 

reclassified. 

Paragraph 16A is added. New text is underlined. Paragraph 16 is included for reference 

but is not proposed for amendment. 

Allowance account for credit losses 

16 When financial assets are impaired by credit losses and the entity records the 

impairment in a separate account (eg an allowance account used to record 

individual impairments or a similar account used to record a collective 

impairment of assets) rather than directly reducing the carrying amount of the 

asset, it shall disclose a reconciliation of changes in that account during the 

period for each class of financial assets. 

16A The carrying amount of financial assets measured at fair value through other 

comprehensive income in accordance with paragraph 4.1.2A of IFRS 9 is not 

directly reduced by an accumulated impairment amount and an entity is 

prohibited from presenting the accumulated impairment amount in the 

statement of financial position. However, an entity shall disclose the 

accumulated impairment amount in the notes to the financial statements. 

Paragraph 20 is amended. New text is underlined and deleted text is struck through. 

Items of income, expense, gains or losses 

20 An entity shall disclose the following items of income, expense, gains or losses 

either in the statement of comprehensive income or in the notes: 

(a) ... 


(vii) financial assets designated measured at fair value through other 

comprehensive income. 

(viii) financial assets mandatorily measured at fair value through 

other comprehensive income, showing separately the amount of 

gain or loss recognised in other comprehensive income during 

the period and the amount reclassified upon derecognition from 

accumulated other comprehensive income to profit or loss for 

the period. 

(b) total interest income and total interest expense (calculated using the 

effective interest method) for financial assets that are measured at 

amortised cost or that are mandatorily measured at fair value through 



other comprehensive income or financial liabilities that are not 

measured at fair value through profit or loss. 

Paragraphs 44N, 44S, 44U and 44V are amended. Paragraphs 44UA and 44X are added. 

New text is underlined and deleted text is struck through. 

Effective date and transition 

... 

44N IFRS 9, issued in October 2010, amended paragraphs 2–5, 8–10, 11, 14, 20, 28, 30 

and 42C–42E, Appendix A, and paragraphs B1, B5, B10(a), B22 and B27, added 

paragraphs 10A, 11A, 11B, 12B–12D, 20A, 44I and 44J, and deleted paragraphs 

12, 12A, 29(b), 44E, 44F, 44H and B4 and Appendix D. An entity shall apply those 

amendments when it first applies IFRS 9 as issued in October 2010 subject to the 

requirements in paragraphs 7.1.1 and 7.1.1A–7.1.1B of IFRS 9 (2010). 

... 

44S When an entity first applies the classification and measurement requirements of 

IFRS 9, it shall present the disclosures set out in paragraphs 44T–44W of this 

IFRS if it elects to, or is as required to, provide these disclosures in accordance 

with IFRS 9 (see paragraph 8.2.12 of IFRS 9 (2009) and paragraph 7.2.14 of IFRS 9 

(2010). 

... 

44U In the reporting period in which IFRS 9 is initially applied, an entity shall 

disclose the following for financial assets and financial liabilities that have been 

reclassified so that they are measured at amortised cost or, in case of financial 

assets, mandatorily measured at fair value through other comprehensive income 

as a result of the transition to IFRS 9: 

(a) the fair value of the financial assets or financial liabilities at the end of 

the reporting period; 

(b) the fair value gain or loss that would have been recognised in profit or 

loss or other comprehensive income during the reporting period if the 

financial assets or financial liabilities had not been reclassified; 

(c) the effective interest rate determined on the date of reclassification; and 

(d) the interest income or expense recognised. 

If an entity treats the fair value of a financial asset or a financial liability as its 

amortised cost at the date of initial application (see paragraph 8.2.10 of IFRS 9 

(2009) and paragraph 7.2.10 of IFRS 9 (2010)), the disclosures in (c) and (d) of this 

paragraph shall be made for each reporting period following reclassification 

until derecognition. Otherwise, the disclosures in this paragraph need not be 

made after the reporting period containing the date of initial application. 

44UA If an entity applies paragraph 7.2.4A of IFRS 9 (2010) because retrospective 

assessment of a modified economic relationship between the principal and the 

consideration for time value of money and credit risk is impracticable, an entity 

39 


shall disclose the carrying value of the financial assets whose contractual cash 

flow characteristics have been assessed in accordance with IFRS 9 (2010), 

notwithstanding the amendments listed in paragraph 7.1.1A of that IFRS until 

those financial assets are derecognised. 

44V If an entity presents the disclosures set out in paragraphs 44S–44U at the date of 

initial application of IFRS 9, those disclosures, and the disclosures in paragraph 

28 of IAS 8 during the reporting period containing the date of initial 

application, must permit reconciliation between: 

(a) the measurement categories in accordance with IAS 39 and IFRS 9; and 

(b) the line items presented in the statements of financial position. 

In the reporting period in which IFRS 9 is initially applied, an entity is not 

required to disclose the line item amounts that would have been reported in 

accordance with the classification and measurement requirements of: 

(a) IFRS 9 for prior periods; and 

(b) IAS 39 for the current period. 

44X An entity that has designated a financial liability as at fair value through profit 

or loss in accordance with paragraph 9 of IAS 39 and has elected to early apply 

paragraphs 5.7.1(c), 5.7.7–5.7.9, 7.2.13 and B5.7.5–B5.7.20 of IFRS 9 (2010) shall 

apply paragraphs 10 and 10A of this IFRS at the same time. 

IAS 1 Presentation of Financial Statements 

The definition of ‘other comprehensive income’ in paragraph 7 is amended. New text is 

underlined. 

Definitions 

7 The following terms are used in this Standard with the meanings 

specified: 

... 

Other comprehensive income comprises items of income and expense 

(including reclassification adjustments) that are not recognised in profit or 

loss as required or permitted by other IFRSs. 

The components of other comprehensive income include: 

... 

(d) gains and losses from investments in equity instruments measured 

designated at fair value through other comprehensive income in 

accordance with paragraph 5.7.5 of IFRS 9 Financial Instruments; 

(da) gains and losses on financial assets measured at fair value through other 

comprehensive income in accordance with paragraph 4.1.2A of IFRS 9; 

(e) ... 




Paragraph 82 is amended. New text is underlined and deleted text is struck through. 

Information to be presented in the profit or loss section or the 

statement of profit or loss 

82 In addition to items required by other IFRSs, the profit or loss section or the 

statement of profit or loss shall include line items that present the following 

amounts for the period: 

... 

(ca) if a financial asset is reclassified out of the amortised cost measurement 

category so that it is measured at fair value through profit or loss, any 

gain or loss arising from a difference between the previous carrying 

amount and its fair value at the reclassification date (as defined in 

IFRS 9); 

(cb) if a financial asset is reclassified out of the fair value through other 

comprehensive income measurement category so that it is measured at 

fair value through profit or loss, any cumulative gain or loss previously 

recognised in other comprehensive income that is reclassified to profit 

or loss; 

(d) ... 

Paragraph 123 of IAS 1 is amended. New text is underlined and deleted text is struck 

through. Paragraph 122 is included for reference only and is not proposed for amendment. 

122 An entity shall disclose, in the summary of significant accounting policies 

or other notes, the judgements, apart from those involving estimations 

(see paragraph 125) that management has made in the process of 

applying the entity’s accounting policies and that have the most 

significant effect on the amounts recognised in the financial statements. 

123 In the process of applying the entity’s accounting policies, management makes 

various judgements, apart from those involving estimations, that can 

significantly affect the amounts it recognises in the financial statements. For 

example, management makes judgements in determining: 

(a) [deleted] 

(b) when substantially all the significant risks and rewards of ownership of 

financial assets and lease assets are transferred to other entities; and 

(c) whether, in substance, particular sales of goods are financing 

arrangements and therefore do not give rise to revenue.; and 

(d) whether contractual cash flows of a financial asset are solely payments of 

principal and interest. 

41 


IFRIC Interpretation 12 Service Concession Arrangements 

Paragraphs 24–25 are amended. New text is underlined and deleted text is struck 

through. 

Financial asset 

... 

24 The amount due from or at the direction of the grantor is accounted for in 

accordance with IFRS 9 as: 

(a) at amortised cost; or 


(b) measured at fair value through other comprehensive income; or 

(c) measured at fair value through profit or loss. 

25 If the amount due from the grantor is measured accounted for at amortised cost 

or fair value through other comprehensive income, IFRS 9 requires interest 

calculated using the effective interest method to be recognised in profit or loss. 



Approval by the Board of Classification and Measurement: 

Limited Amendments to IFRS 9 (Proposed amendments to 

IFRS 9 (2010)) published in November 2012 

The Exposure Draft Classification and Measurement: Limited Amendments to IFRS 9 (Proposed 

amendments to IFRS 9 (2010)) was approved for publication by thirteen of the fifteen 

members of the International Accounting Standards Board. Messrs Cooper and Engström 

voted against its publication. Their alternative views are set out after the Basis for 

Conclusions. 

Hans Hoogervorst Chairman 

Ian Mackintosh Vice-Chairman 

Stephen Cooper 

Philippe Danjou 

Martin Edelmann 

Jan Engström 

Patrick Finnegan 

Amaro Luiz de Oliveira Gomes 

Prabhakar Kalavacherla 

Patricia McConnell 

Takatsugu Ochi 

Paul Pacter 

Darrel Scott 

Chungwoo Suh 

Wei-Guo Zhang 

43 


CONTENTS 


BASIS FOR CONCLUSIONS ON EXPOSURE DRAFT 

CLASSIFICATION AND MEASUREMENT: LIMITED 

AMENDMENTS TO IFRS 9 (PROPOSED AMENDMENTS TO 


from paragraph 

INTRODUCTION BC1 

SCOPE OF THIS EXPOSURE DRAFT BC6 

CLASSIFICATION BC9 

The entity’s business model BC9 

Amortised cost BC13 

Fair value through other comprehensive income BC17 

Fair value through profit or loss BC31 

Alternative approaches to the business model assessment BC34 

Contractual cash flow characteristics of financial assets 

Contractual cash flow characteristics of financial assets mandatorily measured 

BC37 

at fair value through other comprehensive income BC46 

Investments in contractually linked instruments (tranches) BC47 

Bifurcation of embedded features BC49 

Other proposed amendments 

Fair value option for financial assets mandatorily measured at fair value 

BC73 

through other comprehensive income 

Reclassifications into and out of the fair value through other comprehensive 

BC74 

income measurement category 

Presentation and disclosure requirements for financial assets mandatorily 

BC75 

measured at fair value through other comprehensive income BC78 

TRANSITION BC81 

Transition to the proposed amendments to the business model assessment 

Transition to the proposed amendments to the contractual cash flow 

BC81 

characteristics assessment BC83 

Fair value option BC88 

Early application BC92 

Presentation of ‘own credit’ gains or losses on financial liabilities BC96 

Transition disclosures BC107 

First-time adopters of IFRS BC113 

ANALYSIS OF THE EFFECTS OF THIS EXPOSURE DRAFT BC114 

ALTERNATIVE VIEWS ON EXPOSURE DRAFT AV1 



Basis for Conclusions on 

the Exposure Draft Classification and Measurement: 

Limited Amendments to IFRS 9 (Proposed amendments to 


This Basis for Conclusions accompanies, but is not part of, the draft IFRS. 

Introduction 

BC1 This Basis for Conclusions summarises the considerations of the International 

Accounting Standards Board (IASB) in reaching the conclusions in the Exposure 

Draft Classification and Measurement: Limited Amendments to IFRS 9 (Proposed 

amendments to IFRS 9 (2010)). Individual IASB members gave greater weight to 

some factors than to others. 

BC2 When the first requirements of IFRS 9 were issued in 2009, the IASB’s priority 

was to make improvements to the accounting for financial instruments 

available quickly. Consequently, although financial instruments are part of the 

convergence efforts with the US Financial Accounting Standards Board (FASB), 

the IASB issued the classification and measurement requirements for financial 

assets in IFRS 9 while the FASB was still developing its classification and 

measurement model. However, the boards remained committed to achieving 

increased comparability internationally in the accounting for financial 

instruments. 

BC3 In addition, when issuing IFRS 9 in 2009, the IASB acknowledged the difficulties 

that might be created by differences in timing between the Classification and 

Measurement phase of the project to replace IAS 39 Financial Instruments: 

Recognition and Measurement and the Insurance Contracts project. The IASB 

consistently stated that the interaction between IFRS 9 and the Insurance 

Contracts project would be considered once the insurance contracts model has 

been developed sufficiently. 

BC4 Since the publication of IFRS 9, the IASB has received feedback from interested 

parties in various jurisdictions who have chosen to apply IFRS 9 early or who 

have reviewed IFRS 9 in detail in preparation for application. Some have raised 

application issues. 

BC5 Accordingly, the IASB has proposed limited amendments to IFRS 9 with the aims 

of: 

(a) addressing specific application issues raised by those who have chosen to 

apply IFRS 9 early or who have reviewed IFRS 9 in detail in preparation 

for application; 

(b) seeking to reduce key differences with the FASB’s tentative classification 

and measurement model; and 

(c) considering the interaction between the classification and measurement 

of financial assets and the accounting for insurance contracts liabilities. 

45 


Scope of this exposure draft 

BC6 The IASB believes that IFRS 9 is fundamentally sound and will result in useful 

information being provided to users of financial statements. Feedback from 

interested parties has also confirmed that it is operational. Accordingly, 

although some would have liked additional issues to be included in this 

Exposure Draft, 13 the IASB is proposing only limited amendments to IFRS 9 in 

line with the objectives set out in paragraph BC5. 

BC7 In limiting the scope of this Exposure Draft, the IASB was also mindful of the 

need to: 

(a) complete the entire project on financial instruments on a timely basis; 


(b) minimise the cost and disruption to entities that have already 

applied—or begun preparations to apply—IFRS 9. 

BC8 The proposals in this Exposure Draft result both from IASB-only deliberations 

and joint deliberations with the FASB. The following issues were deliberated: 

Classification 


(a) the assessment of a financial asset’s contractual cash flow 

characteristics—specifically, whether, and if so, what, additional 

guidance is required to clarify how the principle is to be applied; 

(b) the need for bifurcation of embedded features in financial assets and, if 

this approach were taken, the basis for bifurcation; 

(c) the basis for, and the scope of, a possible third measurement category 

(financial assets mandatorily measured at fair value through other 

comprehensive income); and 

(d) interrelated issues arising from the topics above (including issues 

considered separately by the IASB). 

The entity’s business model 

BC9 IFRS 9 already requires the assessment of the entity’s business model for 

managing the financial assets. Financial assets are measured at amortised cost, 

subject to the contractual cash flow characteristics assessment, if they are held 

within a business model whose objective is to hold financial assets to collect 

contractual cash flows (a ‘hold to collect’ business model). Financial assets that 

do not meet this condition are measured at fair value through profit or loss. 

BC10 After the issue of IFRS 9, the IASB received questions about the level of sales of 

assets measured at amortised cost that would be considered to be ‘more than 

infrequent’, and when sales activity contradicts the objective of the amortised 

13 For example, a cost exception for some unquoted equity instruments, which was considered, but 

not included in IFRS 9 for the reasons discussed in paragraphs BC5.13–BC5.18 of IFRS 9 (2010). 



cost measurement category. 14 Interested parties also indicated that significant 

judgement is involved when classifying some portfolios—notably so-called 

‘liquidity portfolios’, which are portfolios of assets held by banks to satisfy their 

actual or potential liquidity needs, often in response to regulatory 

requirements— as being measured at amortised cost or fair value through profit 

or loss, and that there may be some inconsistency in the interpretation of 

whether the objective of a business model is to hold financial assets to collect 


BC11 In addition, the IASB received views from some interested parties about the need 

for a ‘fair value through other comprehensive income’ measurement category. 

These views mainly related to: 

(a) whether measurement at fair value through profit or loss appropriately 

reflects the performance of financial assets that are managed both in 

order to collect contractual cash flows and for sale, so as to maximise a 

return from a combination of contractual cash flows and fair value gains. 

Some believed that the business model assessment results in 

classification outcomes that are too limited, ie an entity either holds 

assets to collect contractual cash flows, or it is required to measure the 

financial assets at fair value through profit or loss, and 

(b) the potential accounting mismatch that may arise because of the 

interaction between accounting for financial assets in accordance with 

IFRS 9 and the accounting for insurance contracts liabilities under the 

Insurance Contracts project. In addition, unlike IFRS 9, under the FASB’s 

tentative classification and measurement model 15 at the start of the joint 

deliberations, financial assets were measured at amortised cost, fair 

value through other comprehensive income or fair value through profit 

or loss. 

BC12 Accordingly, the IASB considered whether, depending on the contractual cash 

flows characteristics, financial assets should be mandatorily measured at fair 

value through other comprehensive income on the basis of the business model 

within which they are held and, if so, what the mechanics of this measurement 

category should be. The IASB and the FASB also considered the objective of the 

business models for measurement at amortised cost, fair value through other 

comprehensive income, and fair value through profit or loss. The boards also 

considered which measurement category should be residual. 

14 Paragraph B.4.1.3 of IFRS 9 states that if more than an infrequent number of sales are made out of a 

portfolio, the entity needs to assess whether, and if so, how, such sales are consistent with the 

objective of collecting contractual cash flows (and whether the portfolio would therefore be 

measured at amortised cost). 

15 One of the stated objectives of these proposals is to reduce key differences with the FASB’s model. 

Consequently, depending on the context, references to the FASB’s ‘tentative classification and 

measurement model’ may refer to their model (a) before the joint deliberations (because that 

affected the issues deliberated), (b) after the joint deliberations (to clarify whether the objective was 

achieved), or (c) both (if an aspect of their model did not change as a result of the joint 

deliberations). 

47 


Amortised cost 


BC13 The IASB noted that because of the questions raised and the different views in 

applying a ‘hold to collect’ business model in IFRS 9, it would be necessary to 

clarify the business model assessment irrespective of whether an additional 

business model was to be added to IFRS 9. Thus, the proposals on the business 

model assessment are not intended to merely accommodate an additional 

business model. In the proposed amendments to the application guidance, the 

IASB seeks to address some of the questions received about the business model 

assessment for the amortised cost measurement category. In particular, 

questions were raised about the interaction between the examples in paragraph 

B4.1.4 of IFRS 9 and the reference to selling activity in paragraph B4.1.3. 

BC14 The IASB reaffirmed the existing principle in IFRS 9 that, depending on the 

contractual cash flow characteristics, financial assets would be measured at 

amortised cost if the objective of the business model is to hold those assets to 

collect contractual cash flows. Furthermore, the IASB decided to provide 

additional application guidance on both the types of business activities and the 

frequency and nature of sales that would prohibit financial assets from being 

measured at amortised cost. 

BC15 In order to assess the business model, an entity needs to consider the frequency 

and significance of past sales and the reason for those sales, as well as 

expectations for the future. This is done to determine whether the cash flows 

from financial assets will arise from the collection of contractual cash flows or 

from sale. The IASB noted that the credit quality of financial assets is relevant to 

the entity’s ability to collect contractual cash flows. Consequently, it is 

consistent with an objective of collecting contractual cash flows to sell a 

financial asset when concerns are raised about the collectability of those cash 

flows. 

BC16 The IASB also noted that it would expect sales out of the amortised cost 

measurement category to be less frequent than sales out of the other 

measurement categories in IFRS 9. In order to clarify the relevance (for example, 

the frequency, significance and the reason for the sales) of selling activity to the 

business model assessment, the IASB decided to provide additional application 

guidance to IFRS 9 and to remove some of the language that had appeared 

contradictory. 

Fair value through other comprehensive income 

BC17 In this Exposure Draft, the IASB proposes to introduce a fair value through other 

comprehensive income measurement category for financial assets whose 

contractual cash flow characteristics are solely payments of principal and 

interest, and are managed within a defined business model. The IASB believes 

that this measurement category will: 

(a) provide useful information for the financial assets classified in this 

measurement category, and address the feedback from those who have 

questioned the appropriate classification for those financial assets under 

IFRS 9; 



(b) address the interaction between the classification and measurement of 

financial assets and the accounting for insurance contracts liabilities; 


(c) increase comparability with the FASB’s tentative classification and 

measurement model. 

BC18 Prior to the joint deliberations, the FASB had already decided to include a fair 

value through other comprehensive income measurement category in their 

tentative classification and measurement model for financial assets. This 

difference would have resulted in many financial assets being classified 

differently under IFRS and US GAAP if the FASB were to finalise those proposals, 

because IFRS 9 currently has only two measurement categories for financial 

assets. 

BC19 The boards jointly decided to propose that financial assets should be 

mandatorily measured at fair value through other comprehensive income if, 

and only if, 16 they: 

(a) have contractual cash flow characteristics that give rise on specified 

dates to cash flows that are solely payments of principal and interest on 

the principal amount outstanding (paragraph BC46); and 

(b) are managed within the relevant business model (described in the 

following paragraph). 

BC20 The boards decided to propose that if the entity’s business model is to manage 

financial assets both to collect contractual cash flows and to sell, 17 financial 

assets managed within that business model should be measured at fair value 

through other comprehensive income (depending on their contractual cash 

flows). The IASB noted that the introduction of the fair value through other 

comprehensive income measurement category will also address the feedback of 

those interested parties who have questioned the appropriate classification of 

financial assets held within a business model in which assets are managed both 

in order to collect contractual cash flows and for sale. 18 

BC21 The IASB acknowledged that a third measurement category adds complexity to 

IFRS 9. However, the IASB believes that, for some financial assets, measurement 

at fair value through other comprehensive income would reflect their 

performance better than measurement at either amortised cost or fair value 

through profit or loss, and that the complexity would be justified by the 

usefulness of the information provided. 

BC22 For a business model in which financial assets are managed both in order to 

collect contractual cash flows and for sale, performance will be affected by both 

16 Subject to eligibility for, and election of, the fair value option (paragraph BC74). 

17 The business model assessment is made for a group of financial assets, and therefore an expectation 

to hold (some assets) and an expectation to sell (some assets) are not mutually exclusive. 

18 In contrast, the IASB is aware that other interested parties believe that the 

two-measurement-category classification approach in IFRS 9 results in an appropriate reflection of 

business models for managing financial assets. Some have stated this view within the context of 

interpreting a ‘hold to collect’ business model that is broader than the IASB intended (paragraphs 

BC13–BC16) and therefore might have a different view in the light of the clarifications to amortised 

cost. 

49 



contractual cash flows and the realisation of fair values. Amortised cost 

information reflects the decision to hold the assets to collect contractual cash 

flows unless, and until, they are sold in order to achieve the objective of the 

business model. Fair value information reflects the cash flows that would be 

realised if, and when, they were sold. The IASB therefore decided that the fair 

value through other comprehensive income measurement category should 

result in a fair value carrying amount in the statement of financial position and 

amortised cost information being provided in profit or loss. Accordingly, the 

IASB proposes that for financial assets mandatorily measured at fair value 

through other comprehensive income: 

(a) interest income should be recognised in profit or loss using the effective 

interest method that is already applied to financial assets measured at 

amortised cost in IFRS 9; 

(b) impairment should be recognised in profit or loss using the same credit 

impairment methodology as for financial assets measured at amortised 

cost; and 

(c) the cumulative fair value gain or loss recognised in other comprehensive 

income should be reclassified (‘recycled’) from equity to profit or loss as a 

reclassification adjustment when these financial assets are derecognised. 

BC23 The IASB noted that amortised cost information could not be provided in profit 

or loss without recycling the gains or losses previously accumulated in other 

comprehensive income to profit or loss upon derecognition of those financial 

assets, which is a key feature of the fair value through other comprehensive 

income measurement category. Even so, the IASB also acknowledged that the 

gains and losses accumulated in other comprehensive income are not recycled 

upon derecognition of either: 

(a) equity instruments for which an entity makes an irrevocable election at 

initial recognition to present the fair value changes (other than dividend 

income) in other comprehensive income; or 

(b) financial liabilities designated under the fair value option. 

BC24 However, the IASB noted that some of the reasons for not permitting the 

recycling of these gains or losses accumulated in other comprehensive income 

do not apply to the proposed fair value through other comprehensive income 

measurement category. Specifically: 

(a) Equity instruments: paragraph BC5.25(b) of IFRS 9 discusses the reasons 

why fair value gains and losses are not recycled for equity instruments. 

In publishing this Exposure Draft, the IASB also noted that recycling 

accumulated fair value gains or losses would require an instrument to be 

assessed for impairment. The requirements for the impairment of equity 

instruments in IAS 39 were very subjective and were some of the most 

criticised accounting requirements during the financial crisis. Equity 

instruments are not subject to impairment in accordance with IFRS 9. In 

contrast to that, the IASB is proposing that financial assets mandatorily 



measured at fair value through other comprehensive income should be 

subject to the same impairment approach as for financial assets 

measured at amortised cost. 

(b) Financial liabilities designated under the fair value option: paragraphs 

BC5.52–BC5.57 of IFRS 9 discuss the reasons why accumulated amounts 

attributable to own credit are not recycled for financial liabilities 

designated under the fair value option. One of the main reasons is that 

these financial liabilities are typically held to repay contractual amounts 

and thus the cumulative effect of changes in own credit risk naturally 

unwinds to zero at maturity. In contrast, the proposed business model 

for financial assets mandatorily measured at fair value through other 

comprehensive income is one in which some financial assets are sold 

prior to maturity, and therefore the fair value gains and losses 

recognised in other comprehensive income would not naturally unwind 

at maturity. 

BC25 In addition, requiring recycling for financial assets mandatorily measured at fair 

value through other comprehensive income would be consistent with the FASB’s 

tentative classification and measurement model and thus would achieve the 

objective of reducing key differences between the boards’ classification and 

measurement models for financial instruments. 

BC26 The IASB proposes that, consistent with providing amortised cost information in 

profit or loss, for the purpose of recognising foreign exchange gains and losses 

under IAS 21 The Effects of Changes in Foreign Exchange Rates, a financial asset 

measured at fair value through other comprehensive income should be treated 

as if it was measured at amortised cost in the foreign currency. Consequently, 

exchange differences resulting from changes in the amortised cost basis (ie 

interest income calculated using the effective interest method and impairment) 

should be recognised in profit or loss, with all other exchange differences being 

recognised in other comprehensive income (like other fair value changes). 

BC27 In ED/2009/7 Financial Instruments: Classification and Measurement (the ‘2009 

Exposure Draft’), the IASB proposed that financial assets that had basic loan 

features and were managed on a contractual yield basis would be measured at 

amortised cost, and all other financial assets would be measured at fair value 

through profit or loss. As part of the 2009 Exposure Draft, the IASB also solicited 

feedback on an alternative approach whereby financial assets would have been 

required to be measured at amortised cost if, and only if, they met the criteria 

for measurement at amortised cost that were in the 2009 Exposure Draft, and 

met the definition of loans and receivables in IAS 39. All other financial assets 

would have been measured at fair value in the statement of financial position, 

with changes in recognised value determined on an amortised cost basis in 

profit or loss (including impairment in accordance with IAS 39), and other fair 

value changes presented in other comprehensive income and not recycled to 

profit or loss. 

BC28 The IASB rejected the alternative approach for the reasons discussed in 

paragraph BC4.43 of IFRS 9, and IFRS 9 did not require any fair value changes to 

be presented in other comprehensive income for financial assets (unless the 

presentation alternative was elected for an equity instrument at initial 

51 



recognition). However, the fair value through other comprehensive income 

measurement category in this Exposure Draft is different from the alternative 

approach in the 2009 Exposure Draft, because: 

(a) The alternative approach would have resulted in measurement at fair 

value through other comprehensive income as a residual classification 

for financial assets that did not meet both the definition of loans and 

receivables in IAS 39 and criteria for measurement at amortised cost in 

the 2009 Exposure Draft. In contrast, this Exposure Draft would define 

the criteria for measurement at fair value through other comprehensive 

income and require this measurement only for those financial assets for 

which it provides useful information. 

(b) In addition, recycling upon derecognition would have been prohibited 

under the alternative approach in the 2009 Exposure Draft, and 

consequently that approach would not have resulted in amortised cost 

information being provided in profit or loss for financial assets 


income. In accordance with this Exposure Draft, recycling upon 

derecognition is required for financial assets mandatorily measured at 

fair value through other comprehensive income, just as for financial 

assets measured at amortised cost. 

BC29 In addition to providing useful information as described in the preceding 

paragraphs, the introduction of a fair value through other comprehensive 

income measurement category may improve consistency between the 

classification and measurement of financial assets and insurance contracts 

liabilities. This is because, according to the tentative decisions in the Insurance 

Contracts project, changes in insurance contracts liabilities attributable to 

changes in the discount rate will be presented in other comprehensive income. 

When the insurer holds financial assets measured at fair value through other 

comprehensive income, changes in both the fair value of the financial assets 

that the insurer holds (other than interest calculated using the effective interest 

method and impairment) and in the value of the insurer’s insurance contract 

liabilities arising from the effect of changes in the discount rate would be 

presented in other comprehensive income. 

BC30 Similar to concerns that were raised with the alternative approach in the 2009 

Exposure Draft, interested parties have raised concerns that the introduction of 

the fair value through other comprehensive income measurement category 

would increase the use of fair value relative to IFRS 9. However, the IASB notes 

that it did not seek to increase or reduce the use of fair value measurement. 

Rather it sought to ensure that relevant information is provided. In addition, 

the IASB noted that in some cases financial assets that would have been 

measured at fair value through profit or loss could be measured at fair value 

through other comprehensive income as a result of the proposals. Thus, in these 

cases there would not be an increase in the use of fair value. 

Fair value through profit or loss 

BC31 In IFRS 9, there are only two measurement categories, and the fair value through 

profit or loss measurement category is residual. This Exposure Draft proposes 



the addition of a fair value through other comprehensive income measurement 

category, and the IASB considered whether fair value through profit or loss 

should remain the residual measurement category. The IASB considered that 

there may be some benefits in making the fair value through other 

comprehensive income measurement category residual, because a clear 

distinction could be made in the description of amortised cost and the 

description of fair value through profit or loss. 

BC32 However, the IASB noted that the residual measurement category should provide 

useful information for all of the instruments classified in that measurement 

category. Amortised cost information is provided in profit or loss for both the 

amortised cost and the fair value through other comprehensive income 

measurement categories. This information is only relevant for particular 

business models and for instruments with particular cash flow characteristics. 

As a result, neither of these two measurement categories would be useful as a 

residual measurement category. 

BC33 Consequently, the IASB reaffirmed the existing requirement in IFRS 9—that the 

fair value through profit or loss measurement category is the residual 

measurement category. As was already the case in IFRS 9, the IASB confirmed 

that financial assets held for trading and those managed on a fair value basis 

should be measured at fair value through profit or loss. 

Alternative approaches to the business model assessment 

BC34 In the deliberations leading to the publication of this Exposure Draft, the boards 

jointly considered alternative approaches to the business model assessment for 

all of the measurement categories. These alternatives were considered within 

the context of the amortised cost measurement category, but would have had 

implications for the other measurement categories. 

BC35 The main alternative approach considered was a business-activity based 

approach similar to the FASB’s tentative approach prior to the joint 

deliberations. In summary, the business activities under this alternative would 

have included lending (amortised cost), investing (fair value through other 

comprehensive income), and trading or held for sale (fair value through profit or 

loss). A lending business activity criterion would have required the entity to 

have, in addition to holding the financial assets to collect the contractual cash 

flows, the ability to negotiate any potential adjustments to contractual cash 

flows with the counterparty in the event of a potential credit loss. In the IASB’s 

view, requiring entities to have the ability to negotiate the terms with the 

counterparty might have been unduly costly and complex to apply and might 

have resulted in different classification of lending activities simply because of 

the different legal frameworks in different jurisdictions. In addition, the nature 

of the financial asset would have had an effect on its classification—for example, 

widely-held bonds would typically have failed to meet the criteria due to the 

inability to renegotiate the terms on a bilateral basis. The IASB continued to 

support an approach that would allow financial assets that are held with the 

objective of collecting contractual cash flows to be measured at amortised cost. 

53 



In the IASB’s view, because the anticipated future cash flows for widely-held 

bonds are the contractual cash flows in some cases, measurement at amortised 

cost is appropriate in such cases. 

BC36 For the reasons described in paragraphs BC4.15–BC4.21 of IFRS 9, the IASB 

reaffirmed the principle in IFRS 9 for the amortised cost measurement category, 

and the business model approach in IFRS 9 generally. 


BC37 Contractual cash flow characteristics of financial assets. In accordance with 

IFRS 9, subject to the business model assessment, a financial asset is measured at 

amortised cost if its contractual terms give rise on specified dates to cash flows 

that are solely payments of principal and interest on the principal amount 

outstanding. Interest is consideration for the time value of money and for the 

credit risk associated with the principal amount outstanding during a particular 

period of time. As noted in BC4.7 of IFRS 9, amortised cost information is 

relevant and useful in assessing an entity’s likely cash flows for particular types 

of financial assets in particular circumstances (in other words, for financial 

assets with simple cash flows, depending on the business model). The 

contractual cash flow characteristics assessment also identifies instruments to 

which the effective interest method can be appropriately applied—this method 

simply allocates interest over the life of the instrument and is only suitable for 

instruments with cash flows that only represent principal and interest. 

BC38 This approach was supported by interested parties and generally found to be 

operational. However, the IASB received some application questions subsequent 

to publication of IFRS 9. 

BC39 The boards noted that although the assessment of the contractual cash flow 

characteristics differed between IFRS 9 and the FASB’s tentative classification 

and measurement model (before the joint deliberations), the underlying 

objective was similar—that is, to identify simple debt instruments that could be 

eligible for a measurement category other than fair value through profit or loss. 

BC40 Accordingly, the IASB decided to re-affirm the principle in IFRS 9 in this 

Exposure Draft. However, the IASB also decided to propose a minor amendment 

to the application guidance in IFRS 9 to clarify how the principle should be 

applied to particular instruments to address the questions that had been 

received. 

BC41 The IASB noted that in some cases the economic relationship between principal 

and the consideration for the time value of money and the credit risk in a 

financial asset may be modified. The particular examples considered were when 

a financial asset contains leverage or an interest rate that is reset or resettable 

where the frequency of the reset does not match the tenor of the interest rate (an 

interest rate mismatch). Some had asked whether contractual cash flows could 

be considered to be solely principal and interest as long as the structure of the 

economic relationship between principal and interest was consistent with 

market norms in a particular market. The IASB noted that some market norms 

may not be consistent with the economic concept of the time value of money. 



BC42 Nonetheless, the IASB acknowledged that it did not always intend for financial 

assets to be measured at fair value through profit or loss due to the existence of 

a modified relationship between principal and the consideration for the time 

value of money and the credit risk. However, it was brought to the IASB’s 

attention that some had interpreted the existing application guidance in IFRS 9 

very strictly and concluded that any modification in the economic relationship 

between the principal and the consideration for the time value of money and 

the credit risk resulted in the financial asset being measured at fair value 


BC43 Accordingly, the IASB decided to propose clarifying that a financial asset only 

contains contractual cash flows that are payments of principal and the 

consideration for the time value of money and for the credit risk. However, 

because the relationship between them is modified due to an interest rate 

mismatch feature or leverage (‘modified economic relationship’) an entity needs 

to assess the significance of that modification to conclude whether the financial 

asset’s cash flows are consistent with the notion of solely principal and interest. 

BC44 While developing the proposed clarification, the IASB received feedback about 

interest rates in regulated environments that modify the economic relationship 

between principal and the consideration for the time value of money and the 

credit risk in financial instruments. It was noted that in such environments the 

base interest rates are established and reset by a central authority, and the base 

interest rates may not be reset in a manner that reflects the reset period. 

Furthermore, in such environments there may not be any financial instruments 

available that are priced on a different basis. Some concerns were raised about 

how to determine whether the cash flows on such instruments would be 

considered to satisfy the contractual cash flow characteristics assessment and 

whether the proposed notion of a modified economic relationship was 

operational and appropriate in such environments. The IASB noted that it 

would gather further feedback during and after the comment period on whether 

the clarifications proposed in this Exposure Draft would appropriately address 

any concerns related to interest rates in regulated environments. 

BC45 The IASB considered whether additional disclosure requirements should be 

introduced in the light of the proposed clarification to the assessment of the 

contractual cash flow characteristics. The IASB noted that if the judgements 

made in assessing the contractual cash flow characteristics are significant and 

have a significant effect on the amounts recognised in the financial statements, 

regardless of whether the economic relationship is modified, disclosure of that 

fact would be required by paragraph 122 of IAS 1 Presentation of Financial 

Statements. The IASB noted that this disclosure might be required, for example, 

in cases where large volumes of products are issued with a modified economic 

relationship. The IASB decided to reinforce the general requirement in 

paragraph 122 of IAS 1 by adding the assessment of the contractual cash flow 

characteristics of financial assets to the existing list of examples in paragraph 

123 of IAS 1. 

55 





income 

BC46 As discussed in paragraphs BC17–BC30, the IASB decided to add a fair value 

through other comprehensive income measurement category to IFRS 9, and 

that, subject to the assessment of the business model, a financial asset will be 

mandatorily measured at fair value through other comprehensive income if, 

and only if, its contractual cash flows are solely payments of principal and 

interest. Some interested parties expressed the view that entities should be 

permitted to classify financial assets in the fair value through other 

comprehensive income measurement category even if the assets’ contractual 

cash flows are not solely payments of principal and interest, for example, if they 

contain features such as an equity or commodity link. The IASB believes, 

however, that it would not be appropriate to classify such instruments in the 

fair value through other comprehensive income measurement category. The 

main reason for this decision was that the fair value through other 

comprehensive income measurement category provides amortised cost 

information in profit or loss and consequently the same considerations for 

requiring the contractual cash flow characteristics assessment would apply to 

this measurement category as those that apply to the amortised cost 

measurement category. In particular, paragraph BC4.23 of IFRS 9 explains that 

the effective interest method is not an appropriate method to allocate cash flows 

that are not principal or interest on the principal amount outstanding. In 

addition, to do otherwise would be to ignore the assessment of some assets’ 

contractual cash flow characteristics. This would be inconsistent with the 

classification and measurement model for financial assets. It would also require 

significant changes to IFRS 9, which would go beyond the scope of the limited 

amendments, and would not minimise the extent of the proposed changes as 

desired by the IASB given the time and effort already invested by some entities in 

implementing IFRS 9. 

Investments in contractually linked instruments (tranches) 

BC47 In accordance with IFRS 9, investments in contractually linked instruments 

(tranches) may have contractual cash flows that are solely payments of principal 

and interest if (in summary): 

(a) the contractual cash flows of the tranche give rise to cash flows that are 

solely payments of principal and interest on the principal amount 

outstanding; 

(b) the underlying pool of financial assets has cash flows that are solely 

principal and interest, or they reduce cash flow variability; and 

(c) the tranche being assessed does not have greater exposure to credit risk 

than the exposure of the underlying assets. 19 

BC48 As a result of these specific criteria in IFRS 9 related to tranches, the IASB 

received questions about whether a tranche could have contractual cash flows 

that are solely payments of principal and interest if the tranche is prepayable 

19 Paragraphs B4.1.20–B4.1.26 and BC4.26–BC4.36 of IFRS 9 provide additional detail. 



contingent upon a prepayment occurring in the underlying pool of assets. The 

IASB noted that a key principle underlying the contractual cash flow provisions 

for contractually linked instruments was that an entity should not be 

disadvantaged simply by holding an asset indirectly if the underlying asset has 

cash flows that are solely principal and interest and the holding is not subject to 

more-than-insignificant leverage or a concentration of credit risk relative to the 

underlying assets. Accordingly, the IASB clarified that a tranche may have 

contractual cash flows that are solely payments of principal and interest even if: 

(a) the tranche is prepayable contingent on a prepayment occurring in the 

underlying pool. Because the underlying assets must have contractual 

cash flows that are solely principal and interest, by definition any 

prepayment features in the underlying assets must be consistent with 

solely principal and interest. 

(b) financial assets in the underlying pool are collateralised by assets that do 

not meet the qualifying conditions for measurement at amortised cost. 

In such cases, the possibility that the pool may contain the collateral in 

the future should be disregarded unless the instrument was acquired 

with the intention of controlling the collateral. This is consistent with 

the manner in which collateral underlying financial assets is considered 

more generally for classification purposes, ie that a financial asset that is 

collateralised can still have payments that consist solely of principal and 

interest. 

Bifurcation of embedded features 

BC49 In accordance with IFRS 9, financial assets are not assessed for bifurcation. 

Instead, financial assets are classified in their entirety on the basis of their 

contractual cash flow characteristics (and the business model). However, IFRS 9 

retains the bifurcation requirements in IAS 39 for financial liabilities. 

BC50 After the issue of IFRS 9, some interested parties continued to express support 

for the IASB’s approach to bifurcation in IFRS 9. 

BC51 Others expressed the view that bifurcation should be reintroduced for financial 

assets. Much of this feedback was similar to some that was received in 

developing IFRS 9 (paragraph BC4.88 of IFRS 9). They cited reasons why 

bifurcation is needed for financial assets, including: 

(a) components of some financial assets are managed separately, so 

bifurcation may provide more relevant information to users of financial 

statements; 

(b) a relatively insignificant feature could result in a financial asset being 

measured at fair value through profit or loss in its entirety; and 

(c) symmetry in bifurcating financial assets and financial liabilities is of 

primary importance. Consequently, because the IASB retained 

bifurcation for financial liabilities, financial assets should also be 

bifurcated. 

BC52 In addition, some took the view that IFRS 9 inappropriately classified some 

financial assets at fair value through profit or loss (including financial assets 

57 


with interest rate mismatches and/or leverage) and believed that bifurcation 

would improve the classification of those assets. The IASB believes that the 

questions about the application of the contractual cash flow characteristics 

assessment for some financial assets with interest rate mismatches and/or 

leverage could be resolved by clarifying the application guidance on the cash 

flow characteristics as described in paragraph BC42–BC43. 

BC53 The boards jointly considered whether bifurcation should be pursued for both, 

or either, financial assets and financial liabilities and, if so, what the basis for 

bifurcation should be. In the joint deliberations, three approaches to 

bifurcation were considered: 

(a) no bifurcation; 


(b) ‘closely-related’ bifurcation (ie bifurcation using the ‘closely related’ 

bifurcation criteria that were contained in IAS 39 and were retained for 

financial liabilities in IFRS 9); and 

(c) ‘principal-and-interest’ bifurcation. 

In assessing these approaches, the boards considered whether they were 

appropriate for both, or either, financial assets and financial liabilities. For the 

reasons described in the following paragraphs and consistent with the existing 

requirements in IFRS 9 for the IASB, the boards jointly decided upon a 

no-bifurcation approach for financial assets, and to retain their respective 

existing closely-related bifurcation approaches for financial liabilities. For the 

IASB, the approach to bifurcation was thus unchanged from IFRS 9, and no 

changes to bifurcation are proposed in this Exposure Draft. 

No bifurcation of embedded features 

BC54 A no-bifurcation approach for financial assets is consistent with IFRS 9, which 

requires an assessment of the contractual cash flows of financial assets in their 

entirety. In considering this approach, the IASB noted its rationale in IFRS 9 for 

not bifurcating financial assets (paragraphs BC4.83–BC4.90 of IFRS 9). In 

developing that rationale, the feedback that the IASB considered was similar to 

the feedback it has continued to receive from some interested parties, which is 

described in paragraph BC51. 

BC55 In contrast, the IASB noted that if financial liabilities were not bifurcated, more 

financial liabilities would be measured at fair value through profit or loss, 

including the host component of financial liabilities that are currently 

measured at amortised cost. By bifurcating financial liabilities, far fewer 

non-derivative financial liabilities are measured at fair value through profit or 

loss. It is the effect of remeasuring non-derivative liabilities at fair value 

(reflecting changes in the entity’s own credit risk) that has been raised as the 

greatest concern by users of financial statements. In order to address the issue 

of own credit risk for financial liabilities (which is relevant only to financial 

liabilities), IFRS 9 retains bifurcation for financial liabilities (paragraph BC4.91 

of IFRS 9). 

BC56 In addition, feedback has indicated that different information is useful in 

assessing the amounts, timing and uncertainty of future cash flows from 

financial liabilities than from financial assets (paragraphs BC4.49 and BC4.89(c) 



of IFRS 9). Unlike the difficulty with applying closely-related bifurcation to 

financial assets, this feedback indicated that the closely-related bifurcation 

approach works well in practice for financial liabilities. 

Closely-related bifurcation 

BC57 Although the closely-related bifurcation approach works well for financial 

liabilities, the IASB noted that the assessment of the contractual cash flow 

characteristics of financial assets and the closely-related bifurcation approach do 

not align well. If both the contractual cash flow characteristics assessment and 

the closely-related bifurcation approach were to be required, the question of 

which one to apply first would arise. The boards discussed the following 

possible sequence: 

(a) First, the contractual cash flow characteristics of a financial asset would 

be assessed to determine whether they are solely principal and interest. 

(b) If the contractual cash flows were solely payments of principal and 

interest, the financial asset could be classified in any measurement 

category, depending on the business model. No further analysis would 

be necessary. 

(c) If the contractual cash flows were not solely payments of principal and 

interest, embedded features within the financial asset would be assessed 

for bifurcation under the existing bifurcation requirements (the 

closely-related requirements), including whether their economic 

characteristics and risks are closely related to the economic 

characteristics and risks of the rest of the financial asset. 20 An embedded 

feature that met the criteria for bifurcation in IAS 39 would be 

bifurcated and separately accounted for as a derivative at fair value 

through profit or loss. In contrast, an embedded feature that did not 

meet the criteria for bifurcation would not be bifurcated from the rest of 

the financial asset. 

BC58 The IASB considered the application of this assessment to two financial assets 

with the following characteristics: 

(a) One financial asset whose contractual cash flow characteristics would be 

solely principal and interest, except that it contains an embedded 

derivative that is not consistent with principal and interest or closely 

related to the rest of the financial asset; and 

20 In accordance with paragraph 11 of IAS 39, an embedded derivative is separated (bifurcated) from 

the host contract and accounted for as a derivative if, and only if: 

(a) the economic characteristics and risks of the embedded derivative are not closely related to the 

economic characteristics and risks of the host contract; 

(b) a separate instrument with the same terms as the embedded derivative would meet the 

definition of a derivative; and 

(c) the hybrid (combined) instrument is not measured at fair value with changes in fair value 

recognised in profit or loss (ie a derivative that is embedded in a financial asset or financial liability 

at fair value through profit or loss is not separated). 

59 



(b) another financial asset with the same characteristics as the first (ie its 

contractual cash flows are not solely principal and interest), except that 

the embedded derivative is closely related to the rest of the financial 

asset. 

BC59 The embedded derivative would have been bifurcated from the first financial 

asset and measured at fair value through profit or loss, and the rest of the 

financial asset could have been measured at amortised cost or fair value through 

other comprehensive income, depending on the business model. The IASB 

considered whether the second financial asset should be measured in its 

entirety: 

(a) at fair value through profit or loss, because its contractual cash flows are 

not solely principal and interest; or 

(b) at amortised cost, fair value through other comprehensive income or fair 

value through profit or loss, depending on the business model because 

the embedded derivative is closely related to the rest of the financial 

asset. 

BC60 The IASB noted that the classification outcome in paragraph BC59(a) is 

counter-intuitive. For example, a debt instrument with a leveraged interest rate 

of 1.75 times LIBOR would be measured at fair value through profit or loss in its 

entirety. At the same time, a debt instrument whose contractual cash flows are 

linked to an equity or commodity price would be bifurcated and thus the host 

would be measured at amortised cost, fair value through other comprehensive 

income or fair value through profit or loss (depending on the business model), 

and only the equity or commodity indexed feature would be measured at fair 

value through profit or loss. In other words, a ‘simpler’ financial asset (ie one 

with closely related embedded derivatives) could be classified and measured at 

fair value through profit or loss in its entirety, whereas a more complex 

financial asset (ie one with embedded derivatives that are not closely related) 

could be bifurcated. 

BC61 However, the classification outcome in paragraph BC59(b) would also be 

troublesome because it would effectively override the contractual cash flow 

characteristics assessment. To illustrate using the same simple example, 

depending on the business model, the debt instrument with the interest rate of 

1.75 times LIBOR could be measured at amortised cost or fair value through 

other comprehensive income, even though its cash flows do not consist of 

principal and interest. Consequently, the IASB concluded that, overall, 

combining the concept of solely principal and interest with closely-related 

bifurcation would be complicated and might give rise to contradictory 

outcomes. 

BC62 As noted in paragraphs BC55–BC56, feedback received by the IASB has supported 

the closely-related bifurcation approach for financial liabilities and this 

approach has therefore been retained in IFRS 9 (paragraph BC4.91 of IFRS 9). 21 

21 The notion of solely principal and interest is not used for financial liabilities so the complication of 

the interaction with closely related bifurcation does not arise. 



‘Principal-and-interest’ bifurcation 

BC63 Under the principal-and-interest bifurcation approach, if a financial instrument 

had cash flows that are not solely payments of principal and interest, the 

instrument would be assessed to determine whether it should be bifurcated into: 

(a) a host contract with cash flows that are solely payments of principal and 

interest; and 

(b) an embedded residual feature. 

BC64 The host contract could qualify for a measurement category other than at fair 

value through profit or loss, depending on the business model. The embedded 

feature would be measured at fair value through profit or loss. This approach is 

different to the approach in IFRS 9 for both financial assets and financial 

liabilities. 

BC65 The IASB also considered variations of a principal-and-interest bifurcation 

approach whereby bifurcation would be conditional on: 

(a) the embedded feature meeting the definition of a derivative; or 

(b) the components being separately managed. 

If these conditions were not met, the financial instrument would be measured at 

fair value through profit or loss in its entirety. 

BC66 The IASB noted that in many, if not most, cases, the embedded feature would 

meet the definition of a derivative and would often result in bifurcation of 

components similar to those that are bifurcated under current requirements. If 

the embedded feature were required to be a derivative, it would provide greater 

comparability in the application of the bifurcation guidance and limit 

opportunities for entities to achieve particular accounting outcomes (for 

example, by selecting the features it would treat as part of the host and what 

would be left as the residual). 

BC67 Feedback from some interested parties indicated that a hybrid instrument can 

be managed either as a single unit of account or as more than one unit of 

account. They believe that bifurcation based on separate management of 

components would result in more useful information being provided and 

provide discipline in how bifurcation is achieved. Some who hold this view 

believe that a hybrid contract should be bifurcated only if the components are 

separately managed. When a hybrid instrument is managed in its entirety, it 

represents a single unit of account and, therefore, bifurcation may not provide 

the most relevant information to users of financial statements. 

BC68 The IASB noted that a principal-and-interest bifurcation approach that is based 

on the separate management of the components of an instrument would be an 

instrument-by-instrument assessment of the management of financial 

instruments. This would be inconsistent with the assessment of the business 

model that requires the management of financial assets to be assessed at a 

higher level of aggregation. It would also introduce an additional ‘management’ 

concept into the model. 

61 



BC69 The IASB noted that a principal-and-interest bifurcation approach, including 

variants on such an approach, might, in principle, be more compatible with the 

requirement to assess whether the contractual cash flow characteristics of 

financial assets are solely payments of principal and interest than would a 

closely-related approach. However, because a principal-and-interest bifurcation 

approach would have introduced new concepts into classification and 

measurement for both financial assets and financial liabilities, it would have 

raised questions about how the host contract and embedded feature should be 

defined and measured, and would have introduced the risk of unintended 

consequences. In addition, if it were pursued for financial liabilities, the 

principal-and-interest bifurcation approach would have required 

principal-and-interest-based classification requirements to be developed for 

financial liabilities. While many cite the current bifurcation requirements in 

IAS 39 as one of the greatest sources of complexity in the accounting for 

financial instruments, practice has developed and both preparers and users of 

financial statements understand the current requirements for financial 

liabilities. 

Consideration of approaches for financial assets and financial liabilities 

BC70 The IASB considered which of the three approaches discussed above would result 

in the most useful and relevant information for both, or either, financial assets 

and financial liabilities. 

BC71 In order to decide on the approach in the light of the considerations raised in 

the preceding paragraphs, the IASB noted that a no-bifurcation approach works 

well for financial assets and was supported by most parties. However, the same 

was not considered to be true for financial liabilities (paragraphs BC54–BC56). 

The IASB also noted that the accounting for financial liabilities in IFRS 9, 

including the own credit requirements, are well supported. Also, a 

closely-related bifurcation approach works well for financial liabilities but does 

not align with the contractual cash flow characteristics assessment for financial 

assets (paragraphs BC57–BC62). A principal-and-interest bifurcation approach 

might work for financial assets, but would require a change in practice with 

largely similar outcomes for financial liabilities, and would have introduced 

new concepts and the risk of unintended consequences for both financial assets 

and financial liabilities (paragraphs BC63–BC69). The IASB also noted that the 

project to consider limited amendments to IFRS 9 was limited in scope and that 

no new information about the accounting for financial liabilities had been 

brought to their attention. 

BC72 Consequently, consistent with IFRS 9 the IASB decided to continue to require the 

closely related bifurcation approach for financial liabilities and not to require or 

permit bifurcation for financial assets. 

Other proposed amendments 

BC73 As a result of the proposed introduction of the fair value through other 

comprehensive income measurement category in IFRS 9, the IASB considered the 

following interrelated issues for such instruments: 

(a) availability of the existing fair value option in IFRS 9; 



(b) reclassification; and 

(c) presentation and disclosure requirements. 

Fair value option for financial assets mandatorily measured at fair 

value through other comprehensive income 

BC74 In accordance with IFRS 9, entities are permitted to designate financial assets 

that would otherwise be measured at amortised cost as measured at fair value 

through profit or loss if, and only if, such designation eliminates or significantly 

reduces a measurement or recognition inconsistency (sometimes referred to as 

an ‘accounting mismatch’). Such designation is available at initial recognition 

and is irrevocable. The IASB decided that the same fair value option in IFRS 9 

should be available for financial instruments that would otherwise be measured 

at fair value through other comprehensive income, for the same reasons that 

apply to financial assets measured at amortised cost (paragraph BC4.79 of 

IFRS 9). 

Reclassifications into and out of the fair value through other 

comprehensive income measurement category 

BC75 For the same reasons as noted in the Basis for Conclusions to IFRS 9, 22 the IASB 

decided that reclassification requirements should also apply to financial assets 

mandatorily measured at fair value through other comprehensive income. That 

is, all affected financial assets will be required to be reclassified into or out of the 

fair value through other comprehensive income measurement category when, 

and only when, the entity changes its business model for managing financial 

assets. The IASB noted that the number of measurement categories does not 

affect the rationale for the reclassification requirements in IFRS 9. Consistent 

with the existing requirements in IFRS 9, the IASB decided that reclassifications 

into and out of the fair value through other comprehensive income 

measurement category should be prospective, and that previously recognised 

gains, losses or interest should not be restated. 

BC76 The IASB noted that, because amortised cost information is provided in profit or 

loss for financial assets mandatorily measured at fair value through other 

comprehensive income (paragraph BC22), reclassifications between the 

amortised cost and fair value through other comprehensive income 

measurement categories should not change the recognition of interest revenue. 

That is, the entity would have established the effective interest rate when the 

financial asset was originally recognised and would continue to use that rate 

after the financial asset is reclassified. 

BC77 The IASB also considered disclosure requirements for reclassifications into and 

out of the fair value through other comprehensive income measurement 

category. The IASB noted that paragraphs 12B–12D of IFRS 7 set out disclosure 

requirements for reclassifications of financial assets between the fair value 

through profit or loss and amortised cost measurement categories under IFRS 9. 

The IASB decided that these disclosures would likewise be useful for, and should 

22 Paragraphs BC4.111–BC4.120 of IFRS 9. 

63 



apply to, reclassifications into and out of the fair value through other 

comprehensive income measurement category. 

Presentation and disclosure requirements for financial assets 


income 

BC78 The IASB considered presentation and disclosure requirements for financial 

assets mandatorily measured at fair value through other comprehensive income 

under the proposals in the Exposure Draft. As discussed in paragraph BC22, the 

IASB decided that amortised cost information in profit or loss is relevant for 

financial assets mandatorily measured at fair value through other 

comprehensive income. Consequently, the same impairment and interest 

revenue recognition methods would be required for such financial assets as for 

financial assets measured at amortised cost. Likewise, the IASB decided that, in 

principle, the same presentation and disclosure requirements should be applied 

to these two measurement categories. Accordingly, the IASB decided that the 

impairment disclosures for financial assets mandatorily measured at fair value 

through other comprehensive income should be consistent with those for assets 

measured at amortised cost, including disclosure of an accumulated 

impairment amount. 

BC79 However, the IASB noted that, by definition, financial assets mandatorily 

measured at fair value through other comprehensive income are recognised at 

fair value on the statement of the financial position, and that presentation of an 

accumulated impairment amount on the statement of financial position would 

be a departure from that fair value carrying amount. Consequently, the IASB 

decided to prohibit the presentation of an accumulated impairment amount on 

the face of the statement of financial position for financial assets mandatorily 

measured at fair value through other comprehensive income. 

BC80 The IASB considered whether to add to IAS 1 a requirement to separately present 

in the statement of comprehensive income gains or losses on sales of financial 

assets mandatorily measured at fair value through other comprehensive income. 

The IASB noted that paragraph 82(aa) of IAS 1 requires such separate 

presentation for financial assets measured at amortised cost. That requirement 

was introduced to ensure transparency and provide discipline around sales out 

of the amortised cost measurement category. However, financial assets are 

mandatorily measured at fair value through other comprehensive income 

because they are held within a business model in which assets are managed both 

for the collection of contractual cash flows and for sale. Consequently, because 

sales out of this measurement category are part of the business model, the IASB 

decided not to require separate presentation of gains or losses on such sales in 

the statement of comprehensive income. In addition, the IASB noted that this 

information will be available to users of financial statements. That is because 

paragraph 7 of IAS 1 requires entities to disclose reclassification adjustments of 

components of equity, one of which will be gains or losses on financial assets 

mandatorily measured at fair value through other comprehensive income upon 

derecognition. 



Transition 

Transition to the proposed amendments to the business 

model assessment 

BC81 In accordance with the existing transition provisions in IFRS 9, the business 

model assessment is performed on the basis of facts and circumstances that exist 

on the date of initial application of IFRS 9. The IASB noted that the proposals in 

this Exposure Draft do not have any implications on the ability to assess the 

business model at the date of initial application of IFRS 9. 

BC82 The resulting classification is required to be applied retrospectively. The IASB 

noted that this requirement would also be appropriate for the fair value through 

other comprehensive income measurement category. Accordingly, the IASB did 

not propose any amendments to this requirement. 

Transition to the proposed amendments to the 

contractual cash flow characteristics assessment 

BC83 In accordance with the existing transition provisions in IFRS 9, when IFRS 9 is 

initially applied, the assessment of the contractual cash flow characteristics is 

based on the facts and circumstances that existed at the initial recognition of 

the financial asset, and the resulting classification is applied retrospectively. As 

discussed in paragraphs BC37–BC45, the proposals in this Exposure Draft would 

clarify how the assessment of contractual cash flow characteristics in IFRS 9 

would be applied. The IASB noted that assessing the contractual cash flow 

characteristics in accordance with IFRS 9 already requires judgement but 

acknowledged that the proposed clarification introduces a greater degree of 

judgement and presents a greater risk that hindsight will be used when the 

assessment is required of whether the modification in economic relationship is 

more than insignificant. Accordingly, in the light of the proposed amendment 

to the contractual cash flow characteristics assessment, the IASB concluded that 

it should address situations when it is impracticable (for example, due to the 

risk of using hindsight) to make the assessment based on the terms of the 

financial asset and other relevant facts and circumstances that existed at initial 

recognition of the financial asset. 

BC84 The IASB considered the following alternatives to deal with this issue: 23 

(a) assess the contractual cash flow characteristics using the clarified 

criteria as of the earliest period practicable, as would be required by 

paragraph 24 of IAS 8 in the absence of specific transition provisions; 

(b) assess the contractual cash flow characteristics using the clarified 

criteria based on the terms of the financial asset and the facts and 

circumstances at the date of initial application of IFRS 9; and 

23 These transition alternatives would be different to the way the contractual cash flow characteristics 

of other financial assets are assessed at the date of initial application of IFRS 9 (and on an ongoing 

basis under IFRS 9). 

65 


(c) assess the contractual cash flows as at initial recognition using the 

criteria in IFRS 9 (2010). If an entity were unable to conclude that they 

were solely payments of principal and interest in accordance with the 

criteria in IFRS 9 (2010), the instrument would be measured at fair value 


BC85 In deciding between the alternatives, the IASB noted that the assessment of the 

contractual cash flow characteristics should not be performed other than at the 

date of initial recognition of the financial asset. This would result in an 

outcome that was inconsistent with the principle in IFRS 9, which requires 

contractual cash flows to be assessed as at initial recognition with no subsequent 

reassessment (and this requirement also applies at transition to IFRS 9). The first 

two alternatives are not consistent with that principle; however, the third 

alternative would be consistent with the existing principle (and transition 

provisions) in IFRS 9. Consequently, the IASB proposes that in cases where it is 

impracticable to apply the clarified criteria at the date of initial application of 

IFRS 9, an entity would be required to make the contractual cash flow 

characteristics assessment using the criteria in IFRS 9 (2010). 

BC86 The IASB considered whether additional disclosures should be required because 

of this proposed amendment to the transition provisions. However, the IASB 

noted that paragraph 28(h) of IAS 8 already requires disclosures when 

retrospective application, in accordance with the requirements of a Standard, is 

impracticable upon initial application of that Standard. 

BC87 In addition, the IASB noted that disclosure of the carrying values of the financial 

assets whose contractual cash flows have been assessed under IFRS 9 (2010) 

rather than the clarified version due to impracticability would provide useful 

information and enhance comparability. Accordingly, the IASB decided that 

entities should be required to disclose, until the affected financial assets are 

derecognised, the carrying values of the financial assets whose contractual cash 

flows have been assessed under IFRS 9 (2010) rather than the clarified 

assessment proposed in this Exposure Draft. 

Fair value option 


BC88 The IASB considered the existing transition provisions in IFRS 9 for the fair value 

option in the light of the limited amendments to IFRS 9. When the classification 

and measurement requirements for financial assets are initially applied, entities 

are both: 

(a) permitted to reconsider their fair value option elections for both 

financial assets and financial liabilities—that is, to elect to apply the fair 

value option even if an accounting mismatch already existed before the 

date of initial application and/or revoke the fair value option even if an 

accounting mismatch continues to exist; and 

(b) required to revoke their fair value option elections for both financial 

assets and financial liabilities if an accounting mismatch no longer 

exists at the date of initial application. 

BC89 The transition provision described in the previous paragraph is available only 

once when the entity initially applies the classification and measurement 



requirements for financial assets. 24 Consequently, this transition provision 

would still be available to entities who have not yet applied IFRS 9. In the 

deliberations leading to the publication of this Exposure Draft, the IASB noted 

that entities that apply IFRS 9 (2009) and/or IFRS 9 (2010) before they apply the 

limited amendments to IFRS 9 will have already applied this transition 

provision. However, the application of the amended classification and 

measurement requirements could cause the measurement attribute of some 

financial assets to change and, consequently, accounting mismatches could also 

change. Accordingly, the IASB considered whether such entities should be 

permitted or required to re-consider the existing fair value option elections 

when they apply the limited amendments to IFRS 9. 

BC90 The IASB noted that permitting entities to reconsider all of their fair value 

option elections again would undermine the irrevocable nature of these 

elections. The fair value option is generally only available at initial recognition 

and is irrevocable so that entities are unable to ‘cherry pick’ their designations 

to achieve a desired result in profit or loss. However, the IASB did not consider 

that the ‘cherry picking’ concern would be relevant if the entities were 

permitted to apply the fair value option only as a result of changes in 

accounting mismatches created by the initial application of the limited 

amendments. Additionally, the IASB noted that requiring entities to revoke 

their fair value option elections when an accounting mismatch no longer exists 

would prevent one-sided profit or loss effects until the position that continues to 

be measured at fair value is derecognised, which could be for a long period of 

time. 

BC91 Consequently, the IASB decided that entities that have already applied IFRS 9 

(2009) and/or IFRS 9 (2010) before they apply the limited amendments to IFRS 9 

should be: 

(a) permitted to apply the fair value option to new accounting mismatches 

created by the initial application of the amended classification and 

measurement requirements; and 

(b) required to revoke previous fair value option elections if an accounting 

mismatch no longer exists as a result of the initial application of the 

amended classification and measurement requirements. 


BC92 In accordance with the existing transition provisions in IFRS 9, entities are 

permitted to early apply IFRS 9. If they choose to do so, they are required to 

apply all requirements issued prior to those that they choose to early apply, but 

they are not required to apply subsequent requirements until the mandatory 

effective date. The IASB considered whether entities should continue to be 

permitted to early apply previous versions of IFRS 9 after the completed version 

of IFRS 9 is issued (ie when the Classification and Measurement, Impairment and 

General Hedge Accounting chapters are completed). 

24 Paragraphs BC7.19 and BC7.27–BC7.28 of IFRS 9 discuss the reason that the fair value option 

transition provision is available only once. 

67 



BC93 The IASB noted that having multiple versions of IFRS 9 available for application 

(in addition to IAS 39) reduces comparability for users of financial statements. 

The IASB therefore decided that early application of these limited amendments 

would not be permitted. Furthermore, the IASB decided that six months after 

the completed version of IFRS 9 is issued, previous versions of IFRS 9 should no 

longer be available to be newly early applied. However, those entities that had 

already applied a previous version of IFRS 9 could continue to apply that version. 

The IASB also decided that early application should continue to be permitted but 

that, once the completed version of IFRS 9 is issued, all chapters must be applied 

at once. 25 In considering this issue, the IASB noted that the fair value through 

other comprehensive income measurement category proposed in this Exposure 

Draft has been designed to be applied with the same impairment model as that 

applied to financial assets measured at amortised cost and therefore the 

proposed amendments to IFRS 9 and the new impairment model are best 

applied together as a package. 

BC94 In making these decisions, the IASB noted that the phased approach (including 

transition) was originally developed in response to requests from the G20 and 

the Financial Stability Board that improvements to the accounting for financial 

instruments should be available quickly, and for this reason the classification 

and measurement requirements in IFRS 9 were issued before impairment and 

hedge accounting were completed. Once all of the phases are complete, the IASB 

noted that the decrease in comparability and the complexity of continuing to 

permit a phased approach to transition would not be justified because the 

completed version of IFRS 9 would be available for early application. 

BC95 In addition, the IASB decided that phased early application of IFRS 9 would be 

prohibited effective six months after the completed version of IFRS 9 is issued. 

This was to minimise the cost and disruption to entities that are preparing to 

apply IFRS 9 at the time it is being issued. 

Presentation of ‘own credit’ gains or losses on financial 

liabilities 

BC96 IFRS 9 (2010) requires that the effects of changes in the credit risk of financial 

liabilities designated under the fair value option are presented in other 

comprehensive income unless such treatment would create or enlarge an 

accounting mismatch in profit or loss. Those amounts presented in other 

comprehensive income are not subsequently recycled to profit or loss. The IASB 

developed the ‘own credit’ requirements to respond to widespread concerns 

about the effects of changes in a financial liability’s credit risk affecting profit or 

loss whilst an entity will generally not realise these effects unless the liability is 

held for trading. 

BC97 Some respondents to the Exposure Draft that preceded IFRS 9 (2010) urged the 

IASB to finalise the proposals as an amendment to IAS 39, rather than add the 

proposals to IFRS 9. At that time, the IASB decided that it would be 

inappropriate to amend IAS 39 while it was in the process of replacing it. 

25 Except for the presentation of ‘own credit’ gains or losses on financial liabilities, which would be 

available for early application under the proposals in this Exposure Draft (paragraphs BC97–BC107). 



BC98 The transition requirements in IFRS 9 (2010) require that if an entity elects to 

early apply the classification and measurement requirements for financial 

liabilities, it must also apply the classification and measurement requirements 

for financial assets at the same time. As a result of the IASB’s decision in 

November 2011 to consider limited amendments to IFRS 9, entities that have not 

already applied the classification and measurement requirements of IFRS 9 are 

less likely to consider early applying IFRS 9 before the limited amendments to 

IFRS 9 are issued. 

BC99 Since the publication of IFRS 9 (2010), requests for the IASB to accelerate the 

application of the own credit requirements have intensified. That is because 

markets continue to be volatile and own credit gains or losses remain 

significant, which accentuates the concerns about the usefulness of reporting 

gains when an entity is experiencing deterioration in its own credit quality. 

BC100 As discussed in paragraphs BC92–BC95, the IASB decided that six months after 

the completed version of IFRS 9 is issued, entities will no longer be permitted to 

newly early apply previous versions of IFRS 9. Entities wishing to apply the 

amended classification and measurement requirements will therefore have to 

wait until the completed version of IFRS 9 is issued (and entities have developed 

and implemented the necessary impairment systems) before they are able to 

apply the classification and measurement requirements. That effectively makes 

the availability of the own credit requirements for early application dependent 

on the implementation of an expected loss impairment model. Consequently, 

the IASB considered whether the own credit requirements in IFRS 9 should be 

made available more quickly. 

BC101 The IASB considered the following possible approaches to address the concerns 

about the availability of the own credit requirements for early application: 

(a) do not permit the own credit requirements to be applied in isolation (ie 

no acceleration); 

(b) amend IAS 39 to incorporate the own credit requirements; 

(c) modify the early application guidance in IFRS 9 (2010) and later versions 

of IFRS 9 to permit the early application of the own credit requirements 

in isolation; or 

(d) once the completed version of IFRS 9 is issued, permit the early 

application of the own credit requirements in isolation. 

BC102 The IASB noted that the approach in BC101(a) would result in greater 

comparability and would be consistent with eliminating the phased application 

of IFRS 9. In addition, paragraph 10 of IFRS 7 already requires disclosure of the 

changes in own credit risk, during the period and cumulatively, for financial 

liabilities designated as at fair value through profit or loss in accordance with 

IAS 39. The IASB further observed that preparers also often provide non-GAAP 

information that adjusts for the changes in own credit risk. The IASB 

acknowledged that although this is not an ideal situation, it is a process that is 

fairly well understood by both preparers and users of financial statements and 

results in the users of financial statements understanding the effect of own 

69 


credit risk. However, given the considerations in paragraphs BC96–BC100, the 

IASB decided to make the own credit requirements available for early 

application in isolation. 

BC103 The IASB noted that the approaches in paragraphs BC101(b)–(d) would all have a 

similar outcome—in effect, the accounting for financial instruments would 

continue as in IAS 39 except that the accounting for own credit risk would be 

changed. The difference would be in the steps needed to achieve the outcome 

and the likely time to completion. These approaches would all reduce 

comparability between entities during the time leading up to the mandatory 

effective date of IFRS 9. 

BC104 The IASB noted that the approach in BC101(b) would insulate the application of 

the own credit requirements from the overall IFRS 9 timeline and would be 

consistent with the recommendations made by a number of interested parties. 

However, the IASB reiterated that it no longer intends to make changes to IAS 39 

while it is in the process of replacing it. Furthermore, the own credit 

requirements were developed within the context of IFRS 9 and so would require 

more changes to IAS 39 than simply inserting the own credit requirements. This 

also carries the risk of causing unintended consequences as a result of the 

amendment. 

BC105 The IASB also noted that the approaches in paragraphs BC101(c)–(d) would have 

a similar effect, ie allowing an entity to only change the presentation of own 

credit gains or losses while continuing to otherwise account for financial 

instruments in accordance with IAS 39. However, both of these approaches 

would be inconsistent with the IASB’s decision to eliminate the phased 

implementation of IFRS 9. The IASB noted that an advantage of the approach in 

paragraph BC101(d) is that, if a jurisdiction only wants to adopt IFRS 9 when 

fully complete, this approach is more appropriate so that entities within that 

jurisdiction would be able to early apply only the own credit requirements 

similarly to other entities outside that jurisdiction. 

BC106 The IASB acknowledged that a disadvantage of the approach in paragraph 

BC101(d) is that the early application relief will only be available once the 

remaining phases of IFRS 9 have been issued. However, the IASB does not 

anticipate that the time difference between completion of the approaches in 

BC101(c)–(d) would be significantly different. Consequently, based on current 

circumstances, the IASB decided on the approach in paragraph BC101(d). The 

IASB decided to take this approach because the own credit requirements would 

be available for early application in isolation roughly as soon as they would be 

available if these requirements were instead added to IFRS 9 (2010). By exposing 

the proposal as part of this Exposure Draft, the IASB noted that it would still be 

possible to change this approach if necessary. 

Transition disclosures 


BC107 As part of these proposals, the IASB decided to specify the quantitative 

disclosures that would be required upon initial application of the new 

classification and measurement requirements for financial instruments rather 

than relying on the general quantitative disclosure requirements of other 



Standards. Consequently, the IASB decided to limit the quantitative transition 

disclosures to those contained in IFRS 7. 

Prior periods 

BC108 In accordance with IFRS 9, comparative periods need not be restated when the 

classification and measurement requirements are initially applied. 26 The IASB 

noted that it would be inconsistent to provide comparative relief for the 

classification and measurement requirements while requiring disclosure of 

restated line-item amounts under IFRS 9 for the comparative period. 

Consequently, the IASB confirmed that in the period in which IFRS 9 is initially 

applied, disclosure of the line item amounts that would have been reported in 

prior periods in accordance with the classification and measurement 

requirements in IFRS 9 should not be required. 

Current period 

BC109 The IASB considered three primary factors in evaluating whether each line item 

should be required to be reported in accordance with the classification and 

measurement requirements in both IFRS 9 and IAS 39 in the current period 

when those requirements in IFRS 9 are initially applied. These factors are: 

(a) the usefulness of the disclosures; 

(b) the cost of providing such disclosures; and 

(c) whether the existing transition disclosure requirements are sufficient 

and enable users of financial statements to assess the effect of transition. 

BC110 In assessing the usefulness of this disclosure, the IASB considered the interaction 

between classification and measurement and hedge accounting at transition. 

The concept of hedge accounting does not lend itself to assumptions about what 

hedge accounting (under IAS 39) might have been, because hedge accounting is 

an elective accounting treatment that allows the resolution of accounting 

mismatches. In order to apply hedge accounting, an entity must make that 

election and then, if the hedging relationship meets the qualifying criteria, 

prospectively applies hedge accounting. In accordance with IAS 39, an entity 

can also discontinue hedge accounting at any time and without giving any 

reason. This means that any IAS 39-based hedge accounting information ‘as if 

applied in the current period’ would be based on highly speculative assumptions 

that could distort comparability. Consequently, the IASB confirmed that 

considering hedge accounting in accordance with IAS 39 in the period during 

which hedge accounting in accordance with IFRS 9 is first applied would not be 

appropriate. This means that a line-item disclosure provided for classification 

and measurement in the current period in accordance with IAS 39 would be 

essentially incomplete as it would not give a true picture of IFRS 9 relative to 

IAS 39. The IASB also noted that requiring disclosure of IAS 39 amounts in the 

current period would require entities to incur the costs of running parallel 

systems, which would be onerous for preparers. 

26 However, an entity would be permitted to restate prior periods if it were possible to do so without 

the use of hindsight. 

71 


BC111 Lastly, the IASB noted that IFRS 7 already includes modified transition disclosure 

requirements that focus on changes in the statement of financial position at the 

date of initial application of IFRS 9 and the effect on the key financial statement 

line items for the current period. The IASB believes that these disclosures will 

allow users of financial statements to assess the effect of transition to IFRS 9. In 

addition, the IASB noted that users of financial statements provided favourable 

feedback on these disclosures because these disclosures provide the necessary 

information to explain the transition (paragraphs BC7.35I–BC7.35J of IFRS 9). 

BC112 Consequently, the IASB decided that in the period in which IFRS 9 is initially 

applied, disclosure of the current-period line-item amounts that would have 

been reported in accordance with the classification and measurement 

requirements in IAS 39 should not be required. 

First-time adopters of IFRS 

BC113 The IASB noted that the transition provisions to IFRS 9 for entities that apply 

IFRS for the first time should generally be the same as for entities already 

applying IFRS. However, the IASB acknowledged that there are unique 

considerations for first-time adopters. This is because the date of initial 

application of IFRS 9 for a first-time adopter is defined as the date of transition 

to IFRS and, according to IFRS 1 First-time Adoption of International Financial 

Reporting Standards, consistent accounting policies are required to be applied 

throughout an entity’s first IFRS financial statements. Consequently, in order to 

apply IFRS 9 in its first IFRS financial statements, a first-time adopter must 

present all of the periods in those financial statements in accordance with 

IFRS 9. This requirement may cause extra challenges for first-time adopters 

because retrospectively applying some aspects of the completed version of IFRS 9 

(especially impairment) would be impracticable due to the risk of hindsight if 

those requirements were not actually applied during the reporting periods 

covered by the first IFRS financial statements. Consequently, a first-time adopter 

may be unable to apply the completed version of IFRS 9 in its first IFRS financial 

statements. Accordingly, the IASB intends to reconsider transition to IFRS 9 for 

first-time adopters once the re-deliberations of these proposed limited 

amendments to IFRS 9 and the Impairment project progress sufficiently to make 

sure that first-time adopters of IFRS are given adequate lead time to apply IFRS 9 

and are not at a disadvantage in comparison to existing preparers. 

Analysis of the effects of this Exposure Draft 

Introduction 


BC114 The following paragraphs describe the IASB’s analysis of the likely effects that 

will result from the amendments proposed by this Exposure Draft (the 

‘proposals’) to the classification and measurement requirements for financial 

instruments in IFRS 9 Financial Instruments (issued October 2010)—hereafter 

referred to as IFRS 9. The effects analysed relate only to the proposals rather 

than to IFRS 9 more generally. However, because the proposals would amend 

aspects of IFRS 9, some of the requirements of IFRS 9 are relevant to the effects of 

the proposals and are therefore discussed when it is necessary to provide context 

to this analysis. 



BC115 The IASB is committed to assessing and sharing knowledge about the likely costs 

of implementing proposed new requirements and the likely, associated ongoing 

costs and benefits of each new Standard—these costs and benefits are collectively 

referred to as ‘effects’. The IASB gains insight on the likely effects of the 

proposals for new or revised Standards through its formal exposure of proposals 

and through its analysis and consultations with relevant parties through 

outreach activities. 

BC116 In evaluating the likely effects of the proposals, the IASB has considered how: 

(a) activities would be reported in the financial statements of those applying 

IFRS; 

(b) comparability of financial information would be improved between 

different reporting periods for an individual entity and between 

different entities in a particular reporting period; 

(c) the new approach would improve the usefulness of the financial 

information in assessing the future cash flows of an entity; 

(d) more useful financial reporting would result in better economic 

decision-making; 

(e) the compliance costs for preparers would likely be affected, both on 

initial application and on an ongoing basis; and 

(f) the likely costs of analysis for users of financial statements (including the 

costs of extracting data, identifying how the data has been measured and 

adjusting data for the purposes of including them in, for example, a 

valuation model) would be affected. 

How activities would be reported in the financial 

statements of those applying IFRS 

Approach to classifying financial assets 

BC117 After IFRS 9 was issued, it came to the IASB’s attention that there were different 

views of applying the ‘hold to collect’ business model that result in measuring 

financial assets at amortised cost. Consequently, the IASB is proposing a 

clarification of the ‘hold to collect’ business model (paragraphs B4.1.9–B4.1.9E). 

BC118 In addition, the IASB proposes to add a third measurement category to IFRS 9 

that provides a clear rationale for when financial assets should be measured at 

fair value through other comprehensive income. In accordance with the 

proposals, financial assets are measured at fair value through other 

comprehensive income when they meet the criteria specified in paragraph 

4.1.2A. 27 Consequently the proposals, in conjunction with the related 

requirements in IFRS 9, eliminate accounting arbitrage and reduce complexity 

by eliminating the rule-based classification associated with the financial asset 

measurement categories in IAS 39. 

27 The mandatory classification at fair value through other comprehensive income is for debt 

instruments only and is different from the election to designate equity investments at fair value 

through other comprehensive income as permitted by paragraph 5.7.5 of IFRS 9. 

73 


Bifurcation of embedded features in financial assets 

BC119 IFRS 9 eliminates the application of the complex and rule-based requirements in 

IAS 39 for the bifurcation of hybrid financial assets. In accordance with IFRS 9, a 

financial asset is accounted for in its entirety on the basis of all of its features. 

That is in contrast to IAS 39, where components of a financial asset could have 

been classified and measured separately—resulting in the financial asset being 

measured at amortised cost or fair value through other comprehensive income 

(available for sale), while some or all of the embedded features were measured at 

fair value through profit or loss, even though the financial asset was a single 

instrument that was settled as a whole on the basis of all of its features. 

BC120 Under IFRS 9, a financial asset with an equity-indexed interest rate will be 

measured at fair value through profit or loss in its entirety, because an 

equity-indexed interest rate is not consistent with the notion of principal and 

interest as described in paragraph 4.1.3. However, financial assets with 

structured features will not always be measured at fair value through profit or 

loss because of the embedded features. For example, financial assets that 

contain prepayment or extension features, and unleveraged interest rate caps 

and floors, can be considered to have payments that are solely principal and 

interest if the effect of those features is consistent with the concept of principal 

and interest as described in paragraph 4.1.3. As a result, these may qualify for a 

measurement category other than fair value through profit or loss (depending 

on the holder’s business model). 

BC121 The proposed amendments do not reintroduce bifurcation for financial assets. 

However, the proposals described in paragraphs B4.1.9–B4.1.9E clarify the 

existing concept of ‘solely principal and interest’ in IFRS 9. This will increase the 

range of financial assets that are considered to have payments that are solely 

principal and interest within the provisions of IFRS 9. 

Reclassification 


BC122 IAS 39 included complex rules for the reclassification of financial assets, and 

different entities could choose to reclassify financial assets in different 

circumstances. In contrast, IFRS 9 requires the reclassification of financial assets 

when (and only when) the business model for managing those financial assets 

changes. Changes in business model are demonstrable events and are expected 

to be very infrequent. For example, a change in business model can arise from a 

business combination, if a reporting entity changes the way it manages its 

financial assets following the acquisition of a new business. 

BC123 The proposals extend the concept of reclassifications in IFRS 9 to also apply to 

financial assets that are mandatorily measured at fair value through other 

comprehensive income. 

Main changes to the approach to classifying and measuring 

financial liabilities 

BC124 IFRS 9 carries forward almost all of the requirements in IAS 39 for the 

classification and measurement of financial liabilities, including the bifurcation 

of particular embedded derivatives. As a result, most financial liabilities, apart 



from derivatives or financial liabilities that an entity designates under the fair 

value option, will continue to be measured at amortised cost. 

BC125 The main concern the IASB was asked to address in relation to financial 

liabilities was the so-called ‘own credit’ issue, whereby changes in the credit risk 

of a financial liability give rise to gains or losses in profit or loss. Users of 

financial statements told the IASB that recognising such gains or losses in profit 

or loss does not result in useful information. As a result of retaining the 

bifurcation requirements, in general the only non-derivative financial liabilities 

measured at fair value that will give rise to own credit gains or losses were those 

designated at fair value through profit or loss under the fair value option. IFRS 9 

addresses this concern by requiring that the effect of changes in an entity’s own 

credit risk should be presented in other comprehensive income. 28 This change 

means that entities no longer recognise gains in profit or loss when their credit 

risk deteriorates, and losses when their credit risk improves. 

BC126 The proposals would result in these changes to the own credit requirements 

being available sooner than they would otherwise. Except for these changes to 

early application (paragraphs BC127–BC128), the proposals do not change the 

approach to classifying and measuring financial liabilities. 


BC127 In order to address critical issues during the financial crisis and to make 

improvements to financial reporting available more quickly, the IASB decided to 

replace IAS 39 in phases and to allow entities the option to early apply only some 

phases of IFRS 9 (although if a later phase was applied, earlier phases were also 

required to be applied). Consequently, entities have the option to apply the 

requirements for financial assets (IFRS 9 (2009)) only, or the requirements for 

financial assets and financial liabilities (IFRS 9 (2010)) or, following the 

completion of [draft] Chapter 6 Hedge Accounting, the requirements for 

financial assets, financial liabilities and hedge accounting. However, in this 

Exposure Draft the IASB proposes that once the completed version of IFRS 9 is 

issued, an entity that subsequently elects to apply IFRS 9 early must either apply 

the completed version of IFRS 9 (ie all of the classification and measurement 

requirements, impairment and hedge accounting) or apply only the own credit 

requirements. 

BC128 This will mean that once the completed version of IFRS 9 is issued and before its 

mandatory effective date, fewer combinations of accounting for financial 

instruments will be available to be newly early applied. Until the mandatory 

effective date of IFRS 9, entities that have not already applied a previous version 

of IFRS 9 will either continue to apply IAS 39 unchanged, apply IAS 39 along 

with the own credit requirements (as described in paragraph BC125) or apply the 

completed version of IFRS 9. 

28 This applies unless that treatment would create or enlarge an accounting mismatch in profit or 

loss, in which case all changes in fair value are presented in profit or loss. 

75 


Comparability of financial information 

BC129 At a high level, classification and measurement, in accordance with both IAS 39 

and IFRS 9, require consideration of similar aspects of financial 

instruments—their contractual cash flow characteristics and how they are 

managed. However, IAS 39 and IFRS 9 approach these aspects of financial 

instruments in very different ways. IAS 39 was complex and rule-based and the 

classification of financial assets placed emphasis on an entity’s intentions in 

respect of individual financial assets. IAS 39 also involved an element of free 

choice. As discussed in the following paragraphs, IFRS 9 and these proposals 

require systematic classifications with less accounting choice. Consequently, 

differences in financial reporting between reporting periods for an individual 

entity, and between different entities in a particular reporting period, will more 

often reflect the differences in underlying economics rather than being affected 

by differences in accounting choices. 

The business model assessment 

BC130 In contrast to IAS 39, the business model assessment in IFRS 9 is determined by 

how financial assets are managed. This is not a question of intention for an 

individual instrument but is instead based on an assessment of objective 

evidence at a higher level of aggregation. As a result, the assessment is a matter 

of fact, which results in less accounting choice than is available when applying 

IAS 39 today. 

BC131 The proposals will improve comparability by improving consistency in how 

different entities apply the guidance in IFRS 9 and classify and measure their 

financial assets. The proposals enhance the guidance for assessing whether 

financial assets are held to collect contractual cash flows and should therefore 

be measured at amortised cost (depending on the contractual cash flows). In 

addition, the proposals would add a fair value through other comprehensive 

income measurement category to IFRS 9. The IASB has received some 

preliminary views that the addition of this measurement category will also 

enhance the application of the amortised cost measurement category. In 

addition, the fair value through other comprehensive income measurement 

category will allow some business models to be better reflected in the financial 

statements. This will improve comparability between entities because 

economically similar instruments that are managed in a similar manner will be 

accounted for in the same way. Differences in financial reporting will more 

often reflect the underlying economic differences. 

Reclassifications 


BC132 IAS 39 permitted reclassifications at the entity’s discretion in rare 

circumstances. Users of financial statements consistently commented that these 

reclassifications decreased the comparability and usefulness of the financial 

reporting. In contrast, IFRS 9 makes reclassifications mandatory when (and only 

when) there has been a change in the business model. The reclassification 

requirements will enhance comparability because an entity will generally 

account for its financial instruments consistently over time. The exception will 

be in the rare circumstance that the entity’s business model changes, in which 



case required reclassification nonetheless strengthens comparability because 

financial assets will continue to be accounted for consistent with how they are 

managed. 


BC133 The proposals will remove the option in IFRS 9 to early apply only some of the 

requirements in IFRS 9 (paragraph BC127–BC128). Instead, following the 

completion of IFRS 9, entities will either continue to apply IAS 39 unchanged, 

apply IAS 39 along with the presentation for own credit gains and losses, or 

apply the completed version of IFRS 9. This decision was made in order to 

improve comparability for users of financial statements because there will be 

fewer versions of IFRS 9 available. 

Convergence with the FASB 

BC134 One of the main reasons for undertaking the limited scope project that has led 

to the publication of the proposals was to more closely align IFRS 9 with the 

classification and measurement approach that is being developed by the FASB. 

BC135 The FASB and the IASB have agreed on common language for the objectives of 

the amortised cost and fair value through other comprehensive income 

measurement categories, with the fair value through profit or loss measurement 

category representing the residual measurement category in both boards’ 

models. While the boards may have slightly different application guidance to 

describe these measurement categories, there will be closer alignment between 

IFRS 9 and the FASB’s tentative model by having common objectives for these 

business models and through the introduction of a third measurement category 

for financial assets. This will be beneficial to users of financial statements as it 

will enhance comparability between financial statements prepared in 

accordance with IFRS and those prepared in accordance with US GAAP. 

Usefulness of financial information in assessing the 

future cash flows of an entity 

Financial assets 

BC136 In the Basis for Conclusions to IFRS 9, the IASB acknowledged that some users of 

financial statements support a single measurement method—fair value—for all 

financial assets. However, the IASB continues to believe that both amortised cost 

and fair value can provide useful information to users of financial statements for 

particular types of financial assets in particular circumstances. In issuing both 

IFRS 9 and these proposals, the IASB did not seek to increase or reduce the use of 

fair value measurement. Instead, it sought to ensure that information based on 

a specific measurement attribute is provided when it is relevant. The IASB 

decided that if that measurement attribute and the profit or loss effect for 

financial assets are aligned with both (a) the business model for managing 

financial assets and (b) their contractual cash flow characteristics, financial 

reporting will provide relevant information about the timing, amounts and 

uncertainty of an entity’s future cash flows. For example, financial assets held 

in a traditional banking business that involves deposit funding and mortgage 

lending will typically qualify for amortised cost measurement. 

77 


The business model 


BC137 The business model for managing financial assets determines whether their cash 

flows are realised through the collection of contractual cash flows, through the 

sale of the instruments or both. Consequently, the business model provides 

information that is useful in assessing the amounts, timing and uncertainty of 

the entity’s future cash flows. 

BC138 If the objective of an entity’s business model is to collect contractual cash flows 

then (depending on the characteristics of the contractual cash flows) amortised 

cost measurement in both the statement of financial position and in profit or 

loss provides information about future cash flows. However, if the objective of 

the business model is to realise cash flows by selling financial assets, fair value 

measurement provides more relevant information about future cash flows in 

both the statement of financial position and in profit or loss. 

BC139 The proposals would clarify the application guidance for a ‘hold to collect’ 

business model that results in financial assets being measured at amortised cost 

(depending on their contractual cash flow characteristics). This clarification will 

improve the quality of the financial information and its usefulness in assessing 

the amounts, timing and uncertainty of an entity’s future cash flows by 

resulting in amortised cost measurement only for financial assets that are truly 

held to collect contractual cash flows. 

BC140 Usefulness of financial information will be further improved by the proposal to 

introduce a fair value through other comprehensive income measurement 

category to IFRS 9. As described in greater detail in paragraph 5.7.1A, the fair 

value through other comprehensive income measurement category results in a 

fair value carrying amount in the statement of financial position while the effect 

on profit or loss would be the same as if the financial assets were measured at 

amortised cost. This is considered appropriate for such a business model 

because, by design, both holding and selling activities are taking place, making 

both amortised cost and fair value information relevant to the financial 

statements. Because of the addition of this fair value through other 

comprehensive income measurement category to IFRS 9, some question whether 

the classification and measurement approach will still be an improvement over 

IAS 39. However, in contrast to the available-for-sale measurement category in 

IAS 39, there is a clear business model resulting in measurement at fair value 

through other comprehensive income. This will allow entities to better reflect 

the way in which financial assets are managed and improve the usefulness of the 

information provided for those business models in assessing the timing, 

amounts and uncertainty of an entity’s future cash flows. 

Contractual cash flow characteristics 

BC141 Since the publication of IFRS 9, the IASB has received questions as to how the 

contractual cash flow characteristics of particular instruments should be 

assessed, notably of financial assets that contain leverage or an interest rate 

mismatch feature as described in paragraphs B4.1.9–B4.1.9E. For example, some 

questioned if a relatively simple variable-rate loan would have to be measured at 



fair value through profit or loss if it has an interest smoothing feature that 

limits the variability in the interest rate via a calculation that is consistent with 

the notion of time value of money. 

BC142 As a result, the IASB proposes a clarification that, if the relationship between 

principal and interest is modified by leverage or an interest rate mismatch, the 

effect of the modification should be considered when determining whether the 

cash flows are solely payments of principal and interest. The feedback received 

so far has indicated that this proposed clarification will result in some financial 

assets now meeting the contractual cash flow characteristics assessment in 

IFRS 9. Consequently, this clarification will result in a better alignment between 

the economic concept of principal and interest and the relevant criteria in 

IFRS 9. For example, the simple variable-rate loan described in the previous 

paragraph could be measured at amortised cost because its contractual cash 

flows are economically principal and interest. 

BC143 In addition to questions of clarity, after the publication of IFRS 9 some interested 

parties suggested that bifurcation for financial assets should be reintroduced, 

partly because of a concern that some financial assets will be measured at fair 

value through profit or loss in their entirety, whereas under IAS 39 only the 

derivative component would have been measured at fair value through profit or 

loss. The IASB believes that, to some extent, the concern will be addressed for 

some financial assets by the clarifications to the principal and interest criteria 

because, despite the presence of embedded features, these financial assets may 

economically have principal and interest cash flows. However, for other 

financial assets—for example, where the contractual cash flows are linked to an 

underlying that is unrelated to principal or interest, such as a commodity 

price—the proposals will not change the requirements in IFRS 9. For the reasons 

discussed in detail in paragraphs BC4.83–BC.4.89 of IFRS 9 and BC70–BC72 of 

this Exposure Draft, the IASB believes that classifying financial assets in their 

entirety rather than bifurcating them will result in financial information that is 

more useful in assessing the amounts, timing and uncertainty of future cash 

flows. 

BC144 In addition to providing information that is more useful in assessing future cash 

flows, the elimination of bifurcation also simplifies the information about 

financial assets that is provided to users of financial statements. When a 

financial asset was bifurcated, the components of that financial asset were 

measured in different ways, and also could have been presented in different 

places in the financial statements. Consequently, although the settlement of the 

financial asset considers all of its contractual terms, there was no way to 

understand that financial asset as a whole until settlement took place. 

Financial liabilities 

BC145 In IFRS 9, the IASB made fewer changes to the classification and measurement of 

financial liabilities than to financial assets. Views received from users of 

financial statements, and others, indicated that amortised cost is the most 

appropriate measurement attribute for many financial liabilities because it 

reflects the issuer’s legal obligation to pay the contractual amounts in the 

79 



normal course of business (ie on a going concern basis) and, in many cases, the 

issuer plans to hold liabilities to maturity and pay the contractual amounts. 

BC146 However, if a liability has structured features (for example, embedded 

derivatives), amortised cost is difficult to apply and understand because the cash 

flows can be highly variable. Consequently, the IASB decided to retain the 

bifurcation requirements in IAS 39 for financial liabilities. The views received by 

the IASB indicated that the bifurcation approach in IAS 39 is generally working 

well for financial liabilities and that a new bifurcation approach (such as a 

principal-and-interest-based bifurcation methodology as described in paragraphs 

BC63–BC69) would most likely have the same classification and measurement 

outcomes as the approach in IAS 39. 

BC147 However, views received indicated—and the IASB agreed—that the effects of 

changes in a liability’s credit risk ought not to affect profit or loss unless the 

liability is held for trading, because an entity will generally not realise the 

effects of changes in the liability’s credit risk unless the liability is held for 

trading. The result of the IASB’s decisions, including the own credit 

requirements for financial liabilities described in BC96–BC106, result in 

information being reported for financial liabilities that is more useful in 

assessing the amounts, timing and uncertainty of the entity’s future cash flows. 

BC148 Currently, in accordance with IFRS 9, in order to apply the own credit 

requirements an entity must also apply the classification and measurement 

requirements in IFRS 9 for financial assets. However, as a result of the IASB’s 

decision to consider limited amendments to the classification and measurement 

requirements for financial assets, entities that have not already applied the 

requirements for financial assets are unlikely to consider applying them before 

the limited amendments are issued. The proposals would allow an entity to 

early apply only the own credit requirements and to otherwise continue 

accounting for their financial instruments in accordance with IAS 39, thereby 

enabling entities to benefit from the improved financial reporting for gains or 

losses on changes in own credit risk as requested by preparers and users of 

financial statements alike. 

Better economic decision-making as a result of improved 

financial reporting 

BC149 As described in greater detail in the Basis for Conclusions to IFRS 9 and this 

Exposure Draft, the IASB believes that the proposals, in conjunction with the 

related requirements in IFRS 9, satisfy the fundamental qualitative 

characteristics of useful financial information as stated in Chapter 3 of the 

IASB’s Conceptual Framework. That is, they would: 

(a) provide information that is more useful in assessing the amounts, 

timing and uncertainty of an entity’s future cash flows than the 

information reported in accordance with IAS 39 (BC136–BC148) and is 

therefore more relevant and timely; and 

(b) reduce accounting choice and instead require classifications that are 

consistent with economic substance (BC117–BC128). Consequently, the 

financial reporting is a more faithful representation than the financial 



reporting in accordance with IAS 39. It is also more complete and 

neutral and is supported by economic substance, which will help it to be 

free from error and verifiable. 

In addition, the IASB notes that the proposals, in conjunction with the related 

requirements in IFRS 9, enhance the comparability (BC129–BC135) and 

understandability (BC117–BC128) of the financial information relative to IAS 39. 

BC150 In assessing whether the proposals, in conjunction with the related 

requirements in IFRS 9, would improve financial reporting, the IASB also 

considered the concerns voiced by some interested parties, especially those 

related to financial assets. Some believe that, in conjunction with the related 

requirements in IFRS 9, the proposals will result in more financial assets being 

reported at fair value as compared to the requirements in IAS 39, and this 

concerns them for one or more of the following reasons: 

(a) While fair value might be relevant during times of relative market 

stability, it lacks relevance and reliability during times of relative market 

instability. 

(b) Fair value reporting leads to procyclicality, meaning that it magnifies 

economic or financial fluctuations. In response to changes in fair value, 

entities may need, or choose, to sell different amounts of financial assets 

than they normally would, and the entity may have a different estimate 

of the present value of the future cash flows than is indicated by the fair 

value or market price (fair value amounts that are lower than the entity’s 

estimate of future cash flows are of particular concern). 

(c) Although the objective of many regulatory frameworks is to encourage 

economic stability rather than to provide useful information to users of 

financial statements, regulatory reporting nonetheless uses some of the 

amounts reported in accordance with IFRS. Consequently, IFRS 

reporting has effects for regulated entities. For example, regulated 

entities (especially banks) are often required to increase their capital 

reserves when their regulatory reporting indicates that they may face 

increased risk. Decreases in the fair value of some financial assets and 

increases in impairment losses both trigger the requirement to increase 

capital reserves. In order to meet this requirement, regulated entities 

may decrease lending during an economic downturn, which can further 

exacerbate the downturn. 

BC151 Some are of the view that fair value information is less relevant for all financial 

instruments in times of relative market instability. Others, including the IASB, 

agree that fair value is not equally relevant for all financial instruments, but 

believe that fair value is relevant in all market conditions for some financial 

instruments. Consequently, the IASB believes that the new approach to 

classifying and measuring financial instruments will provide relevant 

information that will lead to better economic decision-making throughout 

economic cycles. 

BC152 The IASB did not seek to increase or reduce the number of financial instruments 

that would be measured at fair value. The use of fair value is essentially 

unchanged in IFRS 9 relative to IAS 39 for financial liabilities (and in fact, a 

81 



portion of the fair value changes will now be recognised in other comprehensive 

income rather than profit or loss), and the proposals do not change this fact. In 

addition, financial assets are measured at fair value only when it is relevant 

because of the contractual cash flow characteristics of the asset and/or the 

entity’s business model. Depending on the entity, its particular financial assets, 

and how it manages them, the proposals, in conjunction with the related 

requirements in IFRS 9, may actually result in fewer financial assets being 

measured at fair value than under IAS 39. For example, because of the 

rule-based criteria for amortised cost measurement under IAS 39, debt securities 

that are quoted in active markets are typically measured at fair value in 

accordance with IAS 39, even if they are held within a business model in which 

assets are managed to collect contractual cash flows. Such financial assets may 

be measured at amortised cost in accordance with IFRS 9, and this would be 

unchanged by the proposals. 

BC153 The IASB acknowledges that the fair value through other comprehensive income 

measurement category may affect some regulated banks, because the Basel III 

regulatory framework removes the ‘regulatory filter’ for fair value gains or losses 

recognised in other comprehensive income. 29 Consequently, if this regulatory 

change remains in place, the fair value changes of financial assets that are 

measured at fair value through other comprehensive income will have a direct 

effect on regulatory capital. However, the addition of the fair value through 

other comprehensive income measurement category will only have the potential 

to adversely affect regulatory capital if those financial assets would otherwise 

have been measured at amortised cost. In these proposals, the IASB is clarifying 

the assessment of contractual cash flows, which may increase the use of the 

amortised cost measurement category relative to IFRS 9. However, the proposals 

will also clarify the meaning of a ‘hold to collect’ business model that results in 

amortised cost measurement (depending on the contractual cash flow 

characteristics), which may cause some financial assets that entities expected to 

measure at amortised cost not to be measured at amortised cost. 

BC154 The objective of financial reporting should be to provide transparent 

information that is useful in order to enable better economic decision-making. 

The IASB notes that the objective of providing useful information does not 

contradict the objective of economic stability. Instead, the IASB believes that 

transparency is essential to maintain stability in the long term. 

The likely effect on compliance costs for preparers, both 

on initial application and on an ongoing basis 

BC155 Although the initial application of IFRS 9 may require significant costs, the IASB 

does not expect preparers to incur significant incremental costs on an ongoing 

basis in comparison to applying IAS 39. The IASB notes the following factors 

that mitigate the ongoing costs of applying IFRS 9 in comparison to IAS 39: 

29 Footnote 10 of Basel III: A global regulatory framework for more resilient banks and banking systems (‘Basel 

III’) published by the Basel Committee on Banking Supervision states “that ‘[t]here is no adjustment 

applied to remove from Common Equity Tier 1 unrealised gains or losses recognised on the balance 

sheet [the ‘regulatory filter’] ... The Committee will continue to review the appropriate treatment of 

unrealised gains, taking into account the evolution of the accounting framework.” In contrast, Basel 

II did contain a regulatory filter. 



(a) the entity’s business model is determined on a more aggregated basis 

than an individual instrument level and is a matter of fact that can be 

observed by the way in which an entity is managed and information 

provided to its management; 

(b) the contractual cash flows need not be analysed in all business models (ie 

when the assets are not held in a business model whose objective is to 

collect the contractual cash flows or where the assets are managed both 

in order to collect contractual cash flows and for sale); and 

(c) IAS 39 already has requirements that entities evaluate the contractual 

terms of their financial instruments on an instrument-by-instrument 

basis. 

BC156 In addition, the IASB notes that the elimination of bifurcation and tainting for 

financial assets measured at amortised cost, as well as having a single 

impairment method, will simplify compliance with the classification and 

measurement requirements for financial assets. 

BC157 For financial liabilities, the classification and measurement model is largely 

unchanged from IAS 39, except for the own credit requirements for financial 

liabilities designated as at fair value through profit or loss under the fair value 

option (paragraphs BC124–BC126). Entities are already required to disclose the 

gains or losses recognised for changes in own credit risk and there should 

therefore not be any incremental costs to preparers for financial liabilities. 

BC158 For the reasons described in the preceding paragraphs, the IASB believes that the 

benefits of the improvements to financial reporting described in the Basis for 

Conclusions to this Exposure Draft will justify the costs to implement and apply 

the proposals, in conjunction with the related requirements in IFRS 9. 

The likely effect on costs of analysis for users of 

financial statements 

BC159 The likely benefits of improved reporting resulting from the proposals, in 

conjunction with the related requirements in IFRS 9, are expected to outweigh 

costs of analysis for users of financial statements. However, the extent of the 

benefit will depend on existing practices. 

BC160 Some of the complexity in IAS 39 is eliminated and it is therefore easier for users 

of financial statements to understand and use the financial reporting 

information for financial instruments. In addition, although some users of 

financial statements favour fair value as a primary measurement attribute for 

financial assets, users of financial statements as a group have consistently 

commented that both amortised cost information and fair value information are 

useful in particular circumstances. The IASB has developed the proposals, in 

conjunction with the related requirements in IFRS 9, to provide information 

that is useful in predicting an entity’s future cash flows. Also, existing and 

proposed disclosures provide additional information that will enable users of 

financial statements to readily understand how financial instruments have been 

classified and measured, and to use supplementary information from 

83 



disclosures in their modelling as desired (for example, the fair value of financial 

instruments measured at amortised cost or the carrying value of reclassified 

financial assets). 



Alternative Views on Exposure Draft 

Alternative views of Messrs Cooper and Engström 

AV1 Messrs Cooper and Engström voted against the publication of the Exposure Draft 

because they disagree with the proposal to introduce the fair value through 

other comprehensive income measurement category. They believe that: 

(a) the proposal would unnecessarily increase complexity for the reporting 

of financial instruments; 

(b) the distinction between the supposed different business models that 

justify measurement at fair value through other comprehensive income 

rather than at fair value through profit or loss is unclear, would lead to 

diversity in practice and is insufficient to justify a difference in 

accounting treatment; and 

(c) faithful representation of insurance contracts in financial statements 

does not need the fair value through other comprehensive income 

measurement category for (some) assets that back insurance liabilities. 

AV2 Messrs Cooper and Engström believe that the existing IFRS 9 classification at 

either amortised cost or fair value through profit or loss should be retained; 

although they support clarification of the ‘hold to collect’ business model and 

the proposed amendments to the contractual cash flow characteristics 

assessment. 

Increased complexity that is undesirable and unnecessary 

AV3 One of the IASB’s main objectives for replacing IAS 39 with IFRS 9 is to reduce 

the complexity of accounting for financial instruments. An important 

component of that is to reduce the number of measurement categories of 

financial instruments and the even larger number of different measurement 

and presentation methods in IAS 39. This objective was widely supported and 

Messrs Cooper and Engström believe this has been achieved in the current IFRS 9 

classification and measurement requirements. They consider that the proposals 

in this Exposure Draft would reverse a significant part of this improvement in 

reporting. 

AV4 Messrs Cooper and Engström believe that, where amortised cost is judged to be 

the most appropriate basis for reporting, this should be applied consistently 

throughout the financial statements. Likewise, if fair value provides the more 

relevant information, it should be applied consistently. In their view the fair 

value through other comprehensive income measurement category provides a 

confusing mixture of amortised cost and fair value measurement that will make 

financial statements more complex and less easy to understand. While they 

accept that in many cases fair value is an important additional piece of 

information for assets that are appropriately reported under amortised cost, 

they believe that this should be provided as supplementary information in the 

notes, albeit with prominent and clear disclosure. 

85 



‘Managed both in order to collect contractual cash flows and to 

sell’ is not a distinct business model 

AV5 The proposed amendments are based on the assertion that there are distinct 

business models that justify accounting for qualifying debt instruments using 

either fair value through other comprehensive income or fair value through 

profit or loss, and that these different business models can be observed by the 

way the business is managed and its performance evaluated by the entity’s key 

management personnel. Messrs Cooper and Engström believe that, while the 

reasons for holding debt instruments outside a ‘hold to collect’ business model 

can vary significantly, it is not possible to identify distinct business models or 

that these reasons justify different accounting. For example, managing assets 

with the objective to maximise return through opportunistic selling and 

reinvestment is given as an illustration of management in order to collect 

contractual cash flows and for sale (see B4.1.4B, Example 1); however, where 

assets are managed and performance evaluated on a ‘fair value basis’ with 

collection of contractual cash flows being ‘incidental’, the proposals would 

require the use of fair value through profit or loss (see paragraph B4.1.6). Messrs 

Cooper and Engström believe that managing to maximise return and on a fair 

value basis is a distinction without a difference and is not a valid justification for 

a very different accounting treatment. Considering the difficulty in 

differentiating between business models that justify either fair value through 

other comprehensive income or fair value through profit or loss, Messrs Cooper 

and Engström believe that there is a significant risk of diversity in practice in 

how these accounting methods would be applied. 

AV6 Messrs Cooper and Engström accept that differentiating between different 

business models is subjective, nevertheless they believe that it is possible to 

identify a distinct ‘hold to collect’ business model for which earning an interest 

margin is the primary objective and where the realisation of fair value changes 

through the sales of assets is not a significant factor in assessing performance. 

In contrast, they do not believe it is possible to differentiate between business 

models aside from the ‘hold to collect’ model, and that in all other cases the 

appropriate accounting treatment is fair value through profit or loss. 

AV7 Messrs Cooper and Engström believe that if fair value is indeed the most 

appropriate measurement basis the full fair value change is relevant in assessing 

overall performance and should be presented within profit or loss. If debt 

instruments are, for example, managed with the objective of maximising return 

then showing only amortised cost-based interest income and realised value 

changes in profit or loss would fail to provide a faithful representation of this 

economic activity. Furthermore, the use of fair value through other 

comprehensive income permits an entity significant freedom to manage profit 

or loss simply through the selective sale of assets (although Messrs Cooper and 

Engström acknowledge that gains and losses from such sales are prominently 

disclosed). While Messrs Cooper and Engström believe that, for assets measured 

at fair value, all fair value changes should be reported in profit or loss, they 

observe that, in accordance with IFRS 9, an entity is able to disaggregate fair 

value gains or losses to highlight certain components (such as the interest yield) 

if this helps in providing relevant information about performance. 



The fair value through other comprehensive income measurement 

category is not necessary to achieve improvements to insurance 

accounting 

AV8 The proposals state that one of the considerations that led the IASB to propose 

introducing the fair value through other comprehensive income measurement 

category is the interaction with the current IASB Insurance Contracts project. 

The tentative decision by the IASB to introduce the fair value through other 

comprehensive income measurement category was taken at the same meeting 

as, and was related to, the tentative decision to require some changes in 

insurance contracts liabilities arising from changes in the discount rate to be 

recognised in other comprehensive income. While the insurance proposals are 

yet to be re-exposed, due to the interaction of the proposals in this Exposure 

Draft and the tentative decisions for insurance contracts Messrs Cooper and 

Engström believe that respondents should consider the relevance of using other 

comprehensive income for insurance contracts when commenting on the 

proposals in this Exposure Draft. 

AV9 Messrs Cooper and Engström believe that the reason that the IASB has 

tentatively concluded that gains and losses attributable to changes in discount 

rates for some insurance contracts should be recognised in other comprehensive 

income is so that the volatility arising from changes in interest rates does not 

impact profit or loss and that the underwriting results can be differentiated 

from the impact of market movements. In order to avoid this approach creating 

an accounting mismatch it would be necessary to recognise in other 

comprehensive income the change in the fair value of assets backing those 

insurance liabilities. This would appear to be partially achieved under the 

proposals in this Exposure Draft since many (but not all) assets held to back 

insurance liabilities would qualify for measurement at fair value through other 

comprehensive income. Some might argue that reporting changes in assets and 

liabilities (other than those arising from interest accretion and impairment) in 

other comprehensive income would successfully isolate the effect of market 

movements and highlight within other comprehensive income the impact of 

any investment (including duration) mismatches. However, Messrs Cooper and 

Engström do not believe this to be the case. 

AV10 If a debt instrument held to back an insurance liability has the same duration as 

that liability, and both are held to maturity, then reporting changes in the value 

of both in other comprehensive income would not be a problem (although it 

would arguably also be of no use as the gains and losses would exactly offset 

anyway). However, in the opinions of Messrs Cooper and Engström, in all other 

situations (such as where assets are sold prior to maturity or where there is a 

duration mismatch between the assets and liabilities) the overall amounts 

separately reported in profit or loss and in other comprehensive income would 

have little meaning. While comprehensive income would be meaningful, the 

resulting disaggregation between profit or loss and other comprehensive income 

would not. Also, the use of other comprehensive income for changes in the 

insurance liability discount rate would create accounting mismatches if assets 

held to back those insurance liabilities did not qualify for measurement at fair 

value through other comprehensive income. 

87 



AV11 Messrs Cooper and Engström believe that the use of other comprehensive 

income for insurance contracts combined with measurement at fair value 

through other comprehensive income for (some) assets that back insurance 

liabilities would lead to unnecessary complexity, a lack of transparency in 

insurance accounting, opportunities for earnings management through 

selective realisation of assets and would not faithfully represent the 

performance of entities engaged in this activity. Accordingly, they believe that 

the introduction of the fair value through other comprehensive income 

measurement category in IFRS 9, combined with the use of other comprehensive 

income for certain changes in insurance contracts liabilities, will undermine the 

potential improvements in the quality of financial reporting by entities engaged 

in issuing insurance contracts resulting from the introduction of an insurance 

contracts standard. 

AV12 Messrs Cooper and Engström believe that the appropriate accounting for 

insurance contracts is to report all changes in insurance liabilities in profit or 

loss and that, consequently, the existing IFRS 9 treatment of related assets 

(which would likely result in the frequent use of fair value through profit or loss, 

either because the assets would be required to be so measured or would be 

designated as such under the fair value option to address accounting 

mismatches that would otherwise arise if the assets were measured at amortised 

cost) should be retained, albeit with appropriate disaggregation of gains or 

losses to enable clear identification of the sources of earnings for such entities. 

Convergence in the accounting for financial instruments 

AV13 Mr Engström supports the ambition of having converged financial instruments 

standards for IFRS and US GAAP. However Mr Engström notes that convergence 

in the accounting for financial instruments is challenging to achieve, and that 

the recent and current projects on offsetting, hedge accounting and impairment 

have not resulted in a converged approach. Mr Engström believes that 

publication of this Exposure Draft should follow the publication by the FASB of 

its final proposals on financial instruments to allow respondents to consider the 

proposals at the same time. Mr Engström acknowledges that this could lead to a 

delay in the completion of the proposed Limited Amendments to IFRS 9 but 

believes that such delay would be justified as it would facilitate convergence in 

this important area. 



[Draft] Amendments to the Illustrative Example of IFRS 9 

Financial Instruments (2010) 

The financial assets table in paragraph IE6 of IFRS 9 (2010) is amended. New text is 

underlined and deleted text is struck through. Paragraph IE6 is included for reference and 

is not proposed for amendment. 

Disclosures on Transition from IAS 39 to IFRS 9 

IE6 The following illustration is an example of one possible way to meet the 

quantitative disclosure requirements in paragraphs 44S–44W of IFRS 7 at the 

date of initial application of IFRS 9. However, this illustration does not address 

all possible ways of applying the disclosure requirements of this IFRS. 

Reconciliation of statement of financial position balances from IAS 39 to IFRS 9 at 1 January 2015 

Financial assets (i) (ii) (iii) (iv) = (i) + (ii) + 

(iii) 

(v) = (iii) 

IAS 39 carrying Reclassifications Remeasurements IFRS 9 carrying Retained earnings 

amount 

amount effect on 

31 December 

1 January 2015 1 January 2015 

Measurement category: 

Fair value through profit or 

loss 

Additions: 

From available for sale 

2014 (1) 

(2), (3) 

(IAS 39) 

From amortised cost (IAS 39) 

(a) (c) 

– required reclassification 


– fair value option elected at 

1 January 2015 

Subtractions: 

To amortised cost (IFRS 9) 

(b) 

To fair value through other 

comprehensive income – 

debt instruments (IFRS 9) 


comprehensive income – 

equity instruments (IFRS 9) 

Total change to fair value 

through profit or loss 

Fair value through other 

comprehensive income 

89 

continued... 


...continued 




(iii) 

(v) = (iii) 


amount 


31 December 


Additions – debt 

instruments: 


2014 (1) 

(2), (3) 

(IAS 39) (g) 


From fair value through 

profit or loss (IAS 39) – 

required reclassification 

based on classification 

(h) 

criteria 


profit or loss (fair value 

option under IAS 39) – fair 

value option criteria not met 

(i) 

at 1 January 2015 


profit or loss (IAS 39) – fair 

value option revoked at 

(j) 

1 January 2015 by choice 

Additions – equity 

instruments: 


(IAS 39) 



option under IAS 39)–fair 

value through other 


elected at 1 January 2015 

From cost (IAS 39) 

Subtractions – debt and 

equity instruments: 

Available for sale (IAS 39) to 

fair value through profit or 

loss (IFRS 9) – required 

reclassification based on 

(k) 

classification criteria (d) 

continued... 



...continued 



(iii) 

(v) = (iii) 


amount 


31 December 



fair value through profit or 

loss (IFRS 9) – fair value 

option elected at 1 January 

2015 


2014 (1) 

(2), (3) 

amortised cost (IFRS 9) (e) 

Total change to fair value 

through other 


Amortised cost 

Additions: 


(IAS 39) (f) 


profit or loss (IAS 39) – 

required reclassification 



option under IAS 39) – fair 

value option criteria not met 

at 1 January 2015 


profit or loss (IAS 39) – fair 

value option revoked at 

1 January 2015 by choice 

Subtractions: 



(IFRS 9) (l) 

To fair value through profit or 

loss (IFRS 9) – required 

reclassification based on 

classification criteria 

continued... 

91 


...continued 



(iii) 

To fair value through profit or 

loss (IFRS 9)–fair value 

option elected at 1 January 

2015 

Total change to amortised 

cost 

IAS 39 carrying 

amount 

31 December 

2014 (1) 


Reclassifications Remeasurements IFRS 9 carrying 

amount 


Total financial asset 

balances, reclassifications 

and remeasurements at 

1 January 2015 (i) Total (ii) = 0 (iii) 

(iv) = (i) + (ii) + 

(iii) 

(v) = (iii) 

Retained earnings 

effect on 


(2), (3) 

(1) Includes the effect of reclassifying hybrid instruments that were bifurcated 

under IAS 39 with host contract components of (a), which had associated 

embedded derivatives with a fair value of X at 31 December 2014, and (b), which 

had associated embedded derivatives with a fair value of Y at 31 December 2014. 

(2) Includes (c), (d), (e) and (f), which are amounts reclassified from other 

comprehensive income to retained earnings at the date of initial application. 

(3) Includes (g), (h), (i), (j), (k) and (l), which are amounts reclassified from retained 

earnings to accumulated other comprehensive income at the date of initial 

application. 



[DRAFT] APPENDIX 

Amendments to the guidance on other IFRSs 

IFRS 1 First-time Adoption of International Financial Reporting 

Standards 

Paragraphs IG56–IG59 are amended. New text is underlined and deleted text is struck 

through. 

Measurement 

IG56 In preparing its opening IFRS statement of financial position, an entity applies 

the criteria in IFRS 9 to identify on the basis of the facts and circumstances that 

exist at the date of transition to IFRSs those financial assets and financial 

liabilities that are measured at fair value through profit or loss and those that 

are measured at amortised cost or, in case of financial assets, at fair value 

through other comprehensive income. The resulting classifications are applied 

retrospectively. 

IG57 For those financial assets and financial liabilities measured at amortised cost or, 

in case of financial assets, at fair value through other comprehensive income in 

the opening IFRS statement of financial position, an entity determines their 

carrying amount cost on the basis of circumstances existing when the assets and 

liabilities first satisfied the recognition criteria in IFRS 9. However, if the entity 

acquired those financial assets and financial liabilities in a past business 

combination, their carrying amount in accordance with previous GAAP 

immediately following the business combination is their deemed cost in 

accordance with IFRSs at that date (paragraph C4(e) of the IFRS). 

IG58 An entity’s estimates of impairments of financial assets mandatorily measured 

at fair value through other comprehensive income or at amortised cost at the 

date of transition to IFRSs are consistent with estimates made for the same date 

in accordance with previous GAAP (after adjustments to reflect any difference in 

accounting policies), unless there is objective evidence that those assumptions 

were in error (paragraph 14 of the IFRS). The entity treats the impact of any later 

revisions to those estimates as impairment losses (or, if the criteria in IAS 39 are 

met, reversals of impairment losses) of the period in which it makes the 

revisions. 30 

Transition adjustments 

IG58A An entity shall treat an adjustment to the carrying amount of a financial asset or 

financial liability as a transition adjustment to be recognised in the opening 

balance of retained earnings (or another component of equity, as appropriate) at 

the date of transition to IFRSs only to the extent that it results from adopting 

IAS 39 and IFRS 9. Because all derivatives, other than those that are financial 

guarantee contracts or are designated and effective hedging instruments, are 


in this Standard in the completed version of this Standard. 

93 



measured at fair value through profit or loss, the differences between the 

previous carrying amount (which may have been zero) and the fair value of the 

derivatives are recognised as an adjustment of the balance of retained earnings 

at the beginning of the financial year in which IAS 39 and IFRS 9 are initially 

applied (other than for a derivative that is a financial guarantee contract or a 

designated and effective hedging instrument). 

IG59 An entity may, in accordance with its previous GAAP, have measured 

investments in equity instruments at fair value and recognised the revaluation 

gain outside profit or loss. If an investment in equity instruments is classified as 

at fair value through profit or loss, the pre-IFRS 9 revaluation gain that had been 

recognised outside profit or loss is reclassified into retained earnings on initial 

application of IFRS 9. If, on initial application of IFRS 9, an investment in an 

equity instrument is classified designated as at fair value through other 

comprehensive income, then the pre-IFRS 9 revaluation gain is recognised in a 

separate component of equity. Subsequently, the entity recognises gains and 

losses on the financial asset such investment in equity instruments in other 

comprehensive income (except dividends, which are recognised in profit or loss) 

and accumulates the cumulative gains and losses in that separate component of 

equity. On subsequent derecognition, the entity may transfer that separate 

component of equity within equity.

Classification and Measurement: Limited Amendments to IFRS 9

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